As a freelance computer professional (a role that I have in addition to a 9-5), it’s been suggested that I form a corporation to provide a significant tax advantage. This would work because the rules for what may be deducted by corporations are less stringent than the rules for deductions by individuals. Thus, my company could “choose” to provide me with a car for work (covering all automotive expenses), a place of business (covering all of my monthly rent), compensation for meals taken while on the job, etc. On the other hand, as an individual, to take these deductions I need to keep track of how many miles I drive for business, how many relative square feet of my apartment are dedicated to business pursuits, etc., thus deduction potential is far more limited.
Counter to this, a friend who is a CPA informs me that the rules for corporations are identical to the rules for individuals. That in truth, I technically do need to track business mileage versus personal mileage and so on, and it is merely the fact that the IRS is far more lax when it comes to enforcing the letter of the tax code on corporations that led to the suggestion above. According to this, the only true benefit of incorporating is a shield for personal liability. If I spill hot coffee into someone’s lap, they’ll have to sue the corporation whose auspices I’m doing business under, rather than myself personally, and my own assets are shielded.
But really, considering that I add enough milk to my coffee that it’s generally not scaldingly hot, it’s just a numbers game. How much tax money could I save by incorporating? What are the chances of an audit? What are the penalties for when the IRS doesn’t agree that a jet-ski is a business expense?