Q-1:

Subject: Taxing of Mulitiply Corporations

 

Question:  Are there any tax rate consequences of owning 100% ownership of two small corporations.   In other words, are profits stacked on top each other for income tax rate purposes? 

A-1:

In cases such as that, referred to as a controlled group of corporations, you need to allocate such things as the lower tax brackets and the Section 179 deduction among them.  The corporations' tax preparer needs to attach a statement to each 1120 explaining the allocation of these items with the names and FEINs of each controlled group corp listed.

Kerry Kerstetter

Q-2:

Thank you....

I'm just setting up the second corporation.   Would it be better if I owned....say only 80% of the second corporation ...or would that not make any difference?

Thanks again.

A-2:

As I constantly have to say, it's extremely dangerous to try to run one corporation without the advice and counsel of an experienced competent tax professional.  With multiple corporations, that danger is multiplied many times.

If you take a look at the applicable Code Section 1563 definitions, you can see how tricky this can get.  It's not just an 80% ownership by a single party.  There are also attribution rules to consider, where ownership by related parties can be attributed to you, as well as the brother-sister controlled group rules with a 50% threshold among five or fewer owners.

Just because each separate corp may not be able to utilize the full benefit of the lower tax brackets and Section 179 deductions doesn't make owning multiple corporations a bad idea.  There are several other reasons to do so, including liability protection, state income sourcing and payroll issues, to name just a few. 

A good tax and or legal pro should be able to help you structure things in the best manner to achieve your goals.

Good luck.

Kerry Kerstetter

 

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- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/12/2006 11:16:00 AM Send this post: