The Definition of Corporate Profits

banner1-f046da5f54664f471e6b6c6d0848e5adCorporate profits are no different that any other kind of profits. The main distinction is that a real corporation, or a “C” corporation is a separate entity which has its own income and expenses. If you think of a corporation as being another, separate person, you are on the right track.

The corporation was invented to have its own identity to legally stop liability from passing to an owner of a business, have a separate business entity from its owner or owners, and to have its own profits and losses.

From that standpoint it operates in business just like it is a person, only it is separate from the actual ownership of a business.

Establishing a corporation can create a situation where you can pay less taxes. For example take the case of a doctor who earns a substantial amount of income from his medical practice. He invests money in real estate due to the early tax deductions available with depreciation and so forth. However after the depreciation runs out, he still has considerable cash flow from rental income.

A separate corporation is set up to receive the rental income, which would otherwise put the doctor in a higher personal tax bracket. The corporation will start out with a lower tax bracket than the doctor will, so considerable taxes will be saved.

When we speak of corporate profits, we are really speaking of the ability to control profits as to amount and duration by using a corporate form for the business.

banner20131130151241769Another way to look at it is that when you form a corporation, you are forming a separate tax bracket for income tax purposes. A person can still own any assets that are placed into a corporation, because he will own or be the majority owner of the shares of stock of the corporation.

A person may be in a 40% marginal tax bracket, and additional income might put him in a 50% bracket, but by utilizing the corporate structure, he throws the extra income into the corporation where it is taxed at a lower rate, and saves considerable taxes overall.

If you have your choice, you should always purchase assets with the lowest tax bracket. In the case just mentioned, the lowest tax bracket is the corporation’s.

The corporation buys the car with cheaper dollars, and then leases the car to the doctor, for example. Assuming the doctor uses the car for business, he deducts the full price of the lease, and the income to the corporation is negligible, as it is taxed in the lower bracket.

A corporation can also show a business loss, and that imagesbusiness loss can be carried forward for 3 years, and be used as an offset to income later on down the line. Rather than making a profit, if a corporation had legitimate business expenses, a loss certainly could occur.

The corporation is a great tool for determining where to place assets and incomes for the purposes of creative tax planning and income distribution.