A C corporation pays taxes on its own income. For a corporation facing significant capital costs, the use of the lower marginal tax rates of a C corporation may produce a total lower tax cost. For example, an individual in the highest personal tax bracket (39.6%) needs to purchase $50,000 in new assets for his business. The amount of pretax income the business must earn to make such a purchase is $58,824 as a C corporation; and $72,464 as an individual.

The use of the lower marginal tax brackets of a C corporation can provide some relief to the cash flow needs of a new business. The use of the marginal tax brackets is not available to personal service corporations.

If the stock qualifies as Code § 1244 stock, a shareholder will be able to recognize a loss up to $100,000 on a jointly filed individual return or $50,000 on a single filed individual return on its disposition as an ordinary loss instead of a capital loss. This benefit accelerates the recognition of the loss. For example, assume a shareholder without any capital gains incurred a stock loss of $30,000. If the stock qualified as § 1244 stock, the shareholder can deduct a current year ordinary loss of $30,000. If the stock was not qualified, the loss would be limited to $3,000 this year and a carry-over of a $27,000 capital loss.

A shareholder employee can lease personal assets to the corporation. The rental payment should be at a fair rental value for the asset, and the asset must be an ordinary and necessary part of the business. The corporation will be entitled to a corporate income tax deduction, and the individual will have non-wage income not subject to FICA tax.

Fringe benefits can be used to save payroll taxes. If an employer pays an employee's business expenses as an ordinary and necessary business expense, FICA tax is generally not due. Also, parts of expenses due to meals and lodging provided to employees for the convenience of the employer may be excluded from the employee's taxable wages for both income tax and FICA tax purposes. The Revenue Reconciliation Act of 1993 eliminated or sharply reduced many employee benefits, such as moving expenses, club dues, business meals and entertainment, and spousal travel costs.

Employer provided health and disability insurance coverage provided to a class of employees is excluded from wages for FICA tax purposes. Generally, amounts contributed on an employee's behalf to a qualified plan will not result in FICA tax to either the employee or employer, and distributions to the employee are not subject to FICA tax. Important limitations apply in this complex area. You should consult with a qualified tax specialist in your planning.

Most small businesses lose money for their first six to eighteen months. Often the shareholders invest their savings in the new venture. An S corporation causes the losses to flow through to the shareholders and reduces their personal taxes. Although items to be considered in electing S corporation status involve more than the flow through of start-up losses, use of an S corporation can improve shareholder cash flow by reducing their taxes.

The Revenue Reconciliation Act of 1993 dramatically changed planning for S corporations. With the top individual tax bracket at 39.6% and the top corporate rate at 35%, it may make sense to eliminate the S election if the corporation is expected to generate significant taxable income. Review your situation with your tax advisor.

Once the business is generating a profit, the S election can be ended either by electing termination for the end of the corporation's tax year, or by triggering an event which automatically ends the election.

Code § 179 allows a taxpayer to elect to expense up to $18,500 of depreciable personal property each tax year. The deduction is reduced to the extent that (1) the business does not have profits; and (2) the total equipment purchased exceeds $200,000. For S corporations, the § 179 limitation of $18,500 in writeoffs is applied at both the corporate and the shareholder level. The maximum writeoff increases to $25,000 for tax years beginning after 2002.

The IRS has been aggressive in attacking excessive compensation as a constructive dividend, thus creating additional corporate income taxes because the dividend is not deductible. The IRS is less successful in its attack when the corporation had established a formula governing compensation. It is advisable to have the owner employee's compensation set by a formula which is built on future growth in the corporation's revenues.

Effective for stock originally issued after August 10, 1993, taxpayers who hold qualified small business stock for more than five years will face a maximum capital gains tax of only 14%. This benefit is extremely complex and can be easily violated during the five-year holding period. The new rules place requirements on both the shareholder and the corporation.

When a shareholder intends to use the new rules and is a minority shareholder, an agreement should be made with the corporation requiring it to continue to comply with the requirements of the Code. Corporate redemptions can end the special treatment, including redemptions which occurred before the stock was issued.

Corporations with taxable income over $15 million pay an additional 3% tax on taxable income between $15 million and $18,333,333. This tax eliminates the benefit of the 34% bracket and cannot exceed $100,000. Effectively, there is a 38% corporate income tax on taxable income from $10 million to $18,333,333. For corporations having a fiscal year end, the tax rate is a blended rate.

The 1993 Tax Act imposes an additional 1% on corporate taxable income over $10 million. The rates for the corporate accumulated earnings tax and the personal holding company tax increased from 28% to 39.6% effective January 1, 1993. Corporate alternative minimum taxes ("AMT") were simplified. The corporate AMT rate remains 20%.

The Taxpayer Relief Act of 1997 repealed the corporate AMT for small business corporations for tax years beginning after December 31, 1997. Generally, a corporation whose gross receipts do not exceed $5,000,000 is a small business corporation. Other rules apply to determine if the corporation qualifies each year thereafter.