          
          
          
                 ARE 80% OF AMERICAN ENTREPRENEURS WRONG?
          
          
               About 80% of America's small businesses are
          unincorporated, according to government statistics. 
          Many of these businesses could reduce their income tax
          bills by incorporating, because the corporation is
          still America's best small-business tax shelter.
          
               Let's look at a small retail business that is
          jointly owned by a husband and wife.  The business has
          gross sales of over $415,000 and a net income of about
          $48,800.  The owners also earn about $4,000 in interest
          and $1,200 in dividends.
          
               Out of this, they have to pay self-employment tax
          of about $6,900.  They also pay medical expenses of
          almost $10,000.  Because they can deduct only medical
          expenses that exceed 7.5% of their adjusted gross
          income, $6,300 of their medical outlay is included in
          their itemized deductions.  Their federal income taxes
          are about $3,800.
          
               Now suppose they incorporate the business.  The
          first thing the corporation lets them do is establish a
          medical-expense reimbursement plan under which the
          corporation pays their medical expenses.  The payments
          are tax-free to the owners and deductible by the
          corporation.
          
               Other expenditures, such as automobile purchases,
          could also be paid for by the corporation.  The value
          of the vehicles would have to be included in the
          owners' gross income, but the expenses would be
          deductible by the corporation -- and it is cheaper to
          include them in gross income than to pay for them with
          after-tax income.
          
               The owners draw salaries from the corporation, but
          they will not need to draw the $48,800 they are netting
          as proprietors, because the medical and other expenses
          are paid by the corporation.  By taking salaries
          totaling about $35,000, they eliminate $2,110 in Social
          Security self-employment taxes.  The standard deduction
          and personal exemptions cut their taxable income to
          $22,850.  Their federal income taxes for the year are
          $3,428.  Total tax savings from incorporating so far
          are about $2,500.
          
               Eventually, they can have the corporation set up a
          pension fund and other benefit programs for them.  They
          can also get more tax-advantaged cash out of the
          corporation by buying business assets themselves and
          leasing them to the corporation.  The corporation's
          taxable income up to $50,000 is taxed at its 15% rate,
          but most small corporations can keep the taxable income
          around zero.
          
               For information on a highly-recommended national
          service that can form a corporation for you in any
          state, write to Incorporation Information Package, 818
          Washington Street, Wilmington DE 19801.
          
          
          
