Nevada Corporation & LLC Tax Considerations

Tax considerations

Income Taxes
Income tax strategies are important tools in preserving your income. Consider the following highlights about federal and state income taxes.

Federal income tax
Income from all business organizations, except corporations, is taxed at individual rates. For those corporations which qualify as “S” corporations, their income also is passed through to the shareholders and is taxed at individual rates. Consider the following comparison of three federal income tax rates.

The owners of a profitable small corporation can often save thousands of dollars in overall income taxes by keeping a modest amount of profits in the corporation and paying out the rest to themselves as employee salaries and bonuses. Called “income splitting,” this works because corporate tax rates on the first $75,000 of corporate income are typically lower than the owners’ personal income tax rates.

Nevada corporation & LLC formation

How income splitting works
As you already know, a corporation is a separate legal entity from its owners, and it pays its own income taxes. This means that if the owners keep some income in the corporation (profits that are not paid out to the owners in the form of salaries and bonuses), it will be taxed at corporate income tax rates, not at the individual income tax rates of its owners.

Income that is kept in the corporation is shown as “retained earnings” on a corporation’s balance sheet, and is reported on IRS Form 1120 each year.

Federal corporate income tax rates on the first $75,000 of corporate income are often lower than the federal individual income tax rates on that same amount of personal income — particularly if the person has additional income from other sources (see the chart below). This means that the corporation’s owners might face a lower overall tax bill if they leave some income in the corporation as retained earnings.

Corporate vs. individual tax rates

2007 corporate rates
15% – $0 to $50,000
25% – $50,001 to $75,000
34% – $75,001 to $100,000
39% – $100,001 to $335,000
34% – $335,001 to $10,000,000

2007 individual rates – single
10% – $0 to $7,550
15% – $7,551 to $30,650
25% – $30,651 to $74,200
28% – $74,201 to $154,800
33% – $154,801 to $336,550

2007 individual rates – married filing jointly
10% – $0 to $15,100
15% – $15,101 to $61,300
25% – $61,301 to $123,700
28% – $123,701 to $188,450
33% – $188,451 to $336,550

However, this illustration does not include the fact that if any portion of the Nevada corporation’s income is distributed to the shareholders, then those dividends are taxed to the individual shareholders in addition to the tax paid by the corporation–the “double taxation” whammy!

Nevertheless, if the shareholders are in a lower tax bracket, or if the corporation is not currently paying dividends, then clearly the corporate form would be advantageous in this example.

Another available tool is the “S” corporation. By making this election, your corporation is not taxed as a separate entity, but the earnings of the business are passed through to the individual shareholders and are taxed at their individual rates.

State income tax
How much did your business pay to your state in income taxes last year? Whatever the amount, by arranging your business affairs so that your Nevada corporation actually earns a portion of your business income, you can easily reduce, or possibly eliminate, state income taxes on your business. Remember, Nevada has no corporate income tax and no individual income tax.

Other taxes
Your state probably has one or more of the following taxes which it imposes on corporations in your state. Use the checklist to compare your state’s “other taxes” with those of Nevada.

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