Corporations and reducing tax

11 Replies

Hey everyone, like most people here, I have read Rich Dad Poor Dad several times now and am inspired each time I read it.  In there he mentions creating a corporation to significantly save on taxes.  He references being able to take your income, then pay certain expenses (like your car payment and vacations) and THEN whatever is left over after that is what you report for tax purposes.  In other words, you can spend most of your income prior to paying any taxes on it.  Has anyone done this with their real estate or other business or have the tax laws changed since then? Thank you SO MUCH!

Originally posted by @Ryan Crowley :

Hey everyone, like most people here, I have read Rich Dad Poor Dad several times now and am inspired each time I read it.  In there he mentions creating a corporation to significantly save on taxes.  He references being able to take your income, then pay certain expenses (like your car payment and vacations) and THEN whatever is left over after that is what you report for tax purposes.  In other words, you can spend most of your income prior to paying any taxes on it.  Has anyone done this with their real estate or other business or have the tax laws changed since then? Thank you SO MUCH!

Yes but there are cost associated with it. Usually the big real estate companies/operation benefit from it. 

Generally, corporations are not good for the real estate, unless we are talking about REITs.

You can normally take most of the same deductions in other legal entities as well. Have to be planned/structured correctly. 


@Ashish Acharya thank you very much for your reply and knowledge. Can you give an example of another entity and structure that would work like this? I have an LLC already, but as far as I know you cannot get any special tax shelter from that.

Originally posted by @Ryan Crowley :

@Ashish Acharya thank you very much for your reply and knowledge. Can you give an example of another entity and structure that would work like this? I have an LLC already, but as far as I know you cannot get any special tax shelter from that.

It’s more of the expense issue rather than entity.

If your expenses are valid business expense, you can deduct them in your LLC as well. You usually don't get to deduct more expenses just because you have Corp. There are some but they are not applicable to most of the taxpayers.

Corporations are helpful when you have employees and are providing fringe benefits. I am assuming that is not the care for you.  

Seconded to what @Ashish Acharya said. Just because you have a corporation doesn't mean you can pay for most of your lifestyle on the business and then effectively pay little tax. You can legally only deduct true business expenses - car and vacations, as you mentioned, likely would not fall into this category (maybe car, if you can prove under audit that the car is used to accomplish your business).

@Ashish Acharya and @David Saperstein . thank you guys very much! Just to clarify, whether I had an LLC or S-Corp, if my monthly business income was $5,000 and for an easy expense example: office space was $1,000/month, business vehicle was $500/month, accounting software was $500/month, then I would effectively only be paying taxes on $3,000 of income ($5,000 - $2,000)? Is that accurate?

Yes you have it right, but to specify -

The key here is defining "income" versus "revenue". You are taxed on income (i.e. profit), which is effectively the money left over after business expenses. So in the scenario you laid out, $3000 would be the income of the business, and therefore is what is taxed. Your $5,000 a month in revenue is your "top line", and not taxed, because nothing has been deducted from it yet.

There are a number of things besides normal expenses that can deduct from your top line to get to taxable income. If you've ever heard of EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization), it's another term to describe your "top line" earnings before deducting all the things that the government allows you to deduct.

Depreciation on your business vehicle, for example, might lower your ultimate tax amount, so instead of being taxed off of $3000, you're only taxed off of $2500 (you got to deduct $500 of depreciation off of your earnings).

This is only scratching the surface to how this works, and there's a lot to unpack here. But this should give you a sense of what to start learning

Originally posted by @Ryan Crowley :

@Ashish Acharya and @David Saperstein . thank you guys very much! Just to clarify, whether I had an LLC or S-Corp, if my monthly business income was $5,000 and for an easy expense example: office space was $1,000/month, business vehicle was $500/month, accounting software was $500/month, then I would effectively only be paying taxes on $3,000 of income ($5,000 - $2,000)? Is that accurate?

Overall yes, but remember that the S-Corp net income is taxed differently at your personal level. And usually you wouldn’t do s-Corp for rentals.