Q-1:

Subject: C Corps

Dear Kerry

I read your post and article concerning the comparison between S and C corps. Once you have paid 15% tax on the profits in the C corp, how do you get the money out without paying tax a second time?

Assume my business profit is $90k a year before my salary. I pay myself $40k a year and leave $50k in the C Corp. We both pay 15% and the C corp now has $42.5k sitting in the bank. I am not understanding how I could use that money (e.g. to invest, buy a house, pay rent, buy a tv or go on a holiday) without having to pay tax again at my personal rate or as a dividend. Can you provide some more insight?

Secondly, you talk about managing income and timing the tax year. If the C corp is operating the business, how does paying it for rent or marketing end up as a deduction on my tax return? As I understand it, the only building I would be renting is my personal residence and as I don’t run the business myself, I have nothing to market / advertise. I can see how it could pay me a consulting fee or a royalty fee, but how do I shift money back to it?

Many thanks in advance for your time,

A-1:

There are several very easy ways to shift income back and forth between a C corp and its owners in ways that are deductible by the payer and income that is only taxed once by the recipient. The key is to be consistent on both sets of books in regard to how each payment is categorized.

You can rent other items to the corp besides your home office. Other business assets, such as vehicles, furniture, computers and other equipment, are frequently leased to a corp.

You need to be working with a qualified professional tax advisor who can help you set this up. You also need to have good up to date books for both your personal and corp finances in order to know how much money needs to be shifted.

One misconception you may have is that the corp account needs to be zeroed out at any time. That isn't necessary. Corporations have the potential to live on forever; so you may want to leave some assets in it when you pass it your heirs.

This really requires working with a tax pro who can properly analyze your unique situation.

Good luck.

Kerry Kerstetter

Q-2:

Hi Kerry

Thanks for your reply and answers. Do your recommendations still apply for personal service corporations or are the majority of the benefits removed
due to the higher tax rate?

Many thanks,

A-2:

Many of the benefits with a PSC are the same as for a regular C corp. Obviously, the income smoothing to utilize the lower C corp tax rates isn't possible.

What many people who are in the PSC professions do is set up a generic C corp to provide business management type services to their other business entities and the generic corp can then utilize the regular C corp tax brackets.

Any experienced tax pro can help you do this. It's not very difficult to do.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/05/2006 12:04:00 PM Send this post: