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Answer from our Guest Expert Peter Soh of - page 3

Corporate Tax Write-offs

If you're a corporation, you enjoy protection of personal liablity for your business's debts, but you're subject to double taxation. You're taxed at the corporate level and at the shareholder level, if the company makes distributions. If your business entity happens to be a corporation, you have a few tax write-offs especially for your business situations. Here are just a few to consider.

Worthless Stock If your company holds stock -- or if you hold stock in another company -- and its goes belly up, as a shareholder, you can deduct worthless stock as an ordinary loss up to $1M of original investment. This benefit is significant because other ordinary income, such as wages, can be offset with these losses. If these losses were capital, they can only offset $3,000 of other income, and any excess can only be deducted to the extent of capital gains.

Tax-Free Merger If your corporation decides to merge with another company to create a new company, this merger can be tax-free. The rationale behind this principle is that the stock in the newly merged entity represents a continuation of the old investment, and thus gain/loss on the investment should be deferred until the investment is sold. The statutory merger is the most common type of reorganization and is called a "Type A reorg." In a Type A reorg, you and your shareholders exchange your stock for the stock of the acquiring corporation. There's no requirement for voting stock; in fact, preferred stock also qualifies. Additionally, you and your shareholders have the option to receive cash or stock. The amount of stock exchanged in the A reorg must equal 50% or more of the merged entity to qualify for tax-free treatment, and the merger must qualify under applicable corporate law.

Accounting Method Deduction Write-offs

Regardless of your form of business, these accounting method write-offs might prove helpful down the road as well.

Defer Income and Accelerate Deductions -- Small businesses -- less than$10 million in gross receipts for the last 5 years -- that don't have inventory should elect the cash method of accounting. This method allows you to defer year-end income by submitting invoices after year-end or instructing customers to pay invoices after year-end. However, if you receive a check before year-end, you must report that income in the year of receipt. Credit card charges are considered deductible in the period they are incurred as well. Another advantage under the cash method of accounting is the option to pre-pay certain expenses. If your business can afford it, you can prepay items like insurance premiums, property taxes, and rent. That way, you can deduct these expenses in the current year-end, thus reducing your overall tax burden.

Worthless Receivables If you happen to be an accrual-basis taxpayer, you can write-off worthless receivables at year-end and charge them to a bad debt expense. Accrual-basis taxpayers must recognize revenue when earned, not received. So when an invoice goes out to a customer, an accrual basis taxpayer recognizes that income as earned. But if you don't actually receive funds before year-end, you can write off that income as a "bad debt." If the income is later collected, you simply recognize it as a bad debt recovery.

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