For instructional purposes, let us assume that John Smith resides in Texas and decides to form a corporation in Texas called ABC Corporation. Additionally, John Smith decides to form a Nevada corporation called XYZ Corporation. In short, the Nevada corporation will legally conduct business in Nevada and the Texas business will legally conduct business in Texas. With the two corporations in place, a savvy business owner can begin to reduce or eliminate their tax liability through the various intercorporate transactions the two corporations will conduct as a result of operating a business.

What are intercorporate transactions? As the term suggests, they are business transactions that occur between two entities. They can include, but are not limited to, lending money, selling or leasing real property, selling or licensing copyrights, patents and trademarks, selling or leasing personal property, and selling goods and services.

Let's say that ABC Corporation needs money for research, consulting fees, to buy property, or even to enter into a lease. ABC Corporation could borrow the necessary funds from XYZ Corporation. Like any other type of loan, the loan would be secured with collateral from the ABC Corporation. Payments would be made by ABC Corporation to XYZ Corporation. The board of directors of XYZ Corporation would also determine the interest rate and other provisions of the loan to ABC Corporation. (Note: Nevada has no usury laws therefore the interest rate can be 25%, if you want it to be, as long as both parties agree to the amount in writing).

If ABC Corporation does not make any money, it owes no taxes. If XYZ Corporation makes money in Nevada, it owes no tax. Additionally, the ABC Corporation loan is secured and collateralized by ABC Corporation assets. Assets that would potential belong to XYZ Corporation should ABC Corporation default on the loan.

Let's look at the issue of inventory. ABC Corporation works with several suppliers that provide their inventory. XYZ Corporations can order the inventory for ABC Corporation from suppliers, and have it billed to XYZ Corporation. XYZ Corporation pays the invoice and then bills ABC Corporation for the materials. If ABC Corporation normally spends $25,000 per year in inventory, the XYZ Corporation would order and pay the $25,000 to suppliers, and then invoice ABC Corporation $50,000 for the inventory items. The result would be that $25,000 of the corporation's profits would move to the tax-free Nevada corporation, XYZ Corporation.