Home
>
Tax
>
Tax Trap #1 -- Waiting to Incorporate: What A Difference A Date Can Make

Tax Trap #1 -- Waiting to Incorporate: What A Difference A Date Can Make

NOTE: This is the first in a series of 5 articles: "Small Business Tax Traps and How To Avoid Them"

If you're a sole proprietor, perhaps you've considered incorporating your small business or self-employment activity.

And so maybe you've been wondering, "When is the best time to incorporate?"

From a legal standpoint, any time is the best time. The sooner you incorporate, the sooner you make the move from the world of unlimited liability to the world of limited liability.

From a tax savings standpoint, any time is the best time. The sooner you incorporate, the sooner you will start putting more money in your own pocket and less in Uncle Sam's.

(For more about the potential tax savings of a corporation, see the second article in this series -- "Tax Trap #2: Double Taxation -- Isn't Once Enough?" http://www.YouSaveOnTaxes.com/tax-trap-2.html)

But from a **tax reporting** standpoint, there is one time of year that stands out as best: January 1st.

Why is that?

Assuming you have a sole proprietorship (or other entity, such as a partnership) that is up and running as of January 1, and assuming you then incorporate that existing entity on any date other than January 1, you face the possibility of filing not one but two business income tax returns for that year.

Here's an example to clarify this important point . . .

Let's say you've been operating your sole proprietorship for a few years, and in early 2005 you decide to incorporate. In January you get around to starting the paperwork, but life gets in the way and you finally get it done in late February. By the time your state processes the Articles of Incorporation, the start date of your new corporation is March 1.

For 2005, you must file a Schedule C for the period of January 1 through February 28, when your business was still a Sole Proprietorship. And you must also file a corporate income tax return for March 1 through December 31.

Maybe that's no big deal. Maybe you enjoy filing one business income tax return so much, filing a second one doesn't bother you. And it may be that the inconvenience of filing two tax returns in 2005 is far outweighed by the legal and tax advantages of incorporating.

Keep in mind, too, that 2005 will be the only year you have to do this "double duty". In 2006 you will only have to file the corporate income tax return.

But if you are thinking about incorporating, the best time to do it, from a tax paperwork standpoint, is as of January 1. Only then do you have a "clean break" from the old sole proprietorship to the new corporation.

This timing issue can also be relevant if you decide to make the switch late in the year. If the effective date of the incorporation is November 15, you will have to file a Schedule C for January 1 through November 14, and a corporate return for November 15 through December 31. In that scenario, you should ask yourself, "Do the benefits of incorporating outweigh the convenience of waiting until January 1?"

So before you decide when to incorporate, take a moment to reflect on the tax reporting consequences of incorporating on January 1 vs. any other date.

Sometimes it may make sense to wait a few weeks (as in the second example), and sometimes it makes sense to "do it now", especially when January 1 is nearby.

Wayne M. Davies is author of 3 tax-slashing eBooks for the self-employed, available separately or as a 3-volume set, "The Ultimate Small Business Tax Reduction Guide". http://www.yousaveontaxes.com/ultimate-guide

To get your free copy of Wayne's 25-page report, "How To Instantly Double Your Deductions" visit: http://www.yousaveontaxes.com/ultimate-guide

In The News:

Fitness centers and workout studios are starting to establish policies that prohibit shooting phone videos to protect people's privacy.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents

Apple recently notified a small number of iPhone customers in 92 countries that their phones may be under attack by mercenary spyware.

An artificial intelligence-powered home security system can fire paintballs and tear gas at trespassers. The camera identifies human faces and animals.

Technology expert Kim Komando gives her tips and tricks on enhancing your user experience a smartphone and other devices you use everyday.

A new camera called NUCA uses artificial intelligence to create deepfake photos of subjects by stripping away clothing in close to real time.

The Kimberley Kube trail-ready camper has a compact but spacious design and combines luxury, functionality and ruggedness for a weekend getaway.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Emails instructing you to reset your password for an account may be legitimate, or they may be scams. Kurt "CyberGuy" Knutsson explains.

Northrop Grumman's Manta Ray uncrewed underwater vehicle aims to revolutionize undersea missions — it glides through the ocean without human assistance.

Learn how to work Google's calendar application to streamline and organize your daily tasks from technology expert Kim Komando.

If you do not want Facebook to have automatic access to your private photos, follow our tips to protect yourself. Kurt “CyberGuy" Knutsson shows you how.

Kurt “CyberGuy" Knutsson goes into detail about Apple’s recent iOS update that allows iPhone users to instantly translate spoken language simply by using the Action Button.

Safeguarding your digital life with a reliable physical backup isn't just a precaution, it's a necessity. Kurt “CyberGuy" Knutsson provides the essential backup checklist.

Kurt “CyberGuy" Knutsson reveals how a Redditor exposed false recycling claims at their apartment, highlighting a report that only 21% of U.S. recyclables are processed.

Kurt "CyberGuy" Knutsson offers a travel toolkit featuring five technology tools to help you with booking flights and hotels for your summer vacation.

The bubble behind the clock on your iPhone can appear in different colors. Kurt "CyberGuy" Knutsson explains what each of those colors mean.

Scammers are using the power of artificial intelligence to mimic voices of people and are using the fake voices to commit crimes, like kidnappings.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Tech guru Kurt "CyberGuy" Knutsson explains the science behind the Invisibility Shield, a 6-foot shield that makes people become invisible.

The International Olympic Committee on Friday announced plans to use AI in various Olympic aspects, including athlete identification, training and judging.

Tech guru Kurt "CyberGuy" Knutsson explains an easy trick to avoid squinting while working or surfing the web by zooming in on your personal computer.

Streaming giant Roku has recently been targeted by a pair of cyberattacks, and the company confirmed over a half million Roku accounts were compromised.

The Land Aircraft Carrier combines an all-terrain, six-wheeled vehicle with a two-seat aircraft, which features electric vertical takeoff and landing.

The European Union has sent TikTok a "request for information" on the video sharing platform's newest app, TikTok Lite, under the Digital Services Act, with the aim to clean up social media.