Question

One of your clients, Josh, has started a high-tech marketing company and is interested in incorporating. He is concerned, however, about the double taxation issue and wants to know if there are any tax advantages to incorporating. You should explain to him that:
A. corporations can split income, which can have the effect of actually lowering tax rates.
B. corporations can receive income from interest or investment income and thereby avoid double taxation.
C. all corporations are exempt from paying the alternative minimum tax.
D. corporations cannot be required to use the accrual method.

Answer 1

Solution: corporations can split income, which can have the effect of actually lowering tax rates

Explanation: Income splitting minimizes the double taxation issue because only a portion of the profits are given as salary (which is deductible corporation's part), and leaving the remainder for reinvesting in the corporation. Thus, consequently, the gross income of the owner and the corporation’s taxable income are reduced.

New corporations are exempt from the AMT during the first year of existence; and corporations are usually required to use the accrual method.