Q:

Subject: Two entities together

Kerry,

In a recent post to your blog you wrote: "a Personal Service Corporation (PSC) which is subject to much higher tax rates than normal C corps.  There are easy ways around this, often by the use of two entities.  A competent tax advisor should have no problem in helping you set things up properly."

I know of many doctors that have done this, but it made wonder why the IRS wouldnt classify this as a type of tax shelter. The only reason that someone is creating the second entity is simply to reduce their tax rates i.e. there is no true business purpose.

Thanks.

A:

I'm not really sure if I understand the motivation of your question. 

If you are worried that IRS could challenge such an arrangement, that is always a possibility because IRS can always challenge anything they want to, and the burden of proof is on the taxpayer to establish the validity of the structure.  Too many people self censor themselves and are too scared to take certain tax savings steps because of the fear that IRS may want to dispute it.  As I've pointed out on many occasions, the government gets a lot of extra tax money from people for just this reason.

While one of the big benefits of setting up a separate corporation to provide various back-room business services for a PSC may be net tax savings, having those other functions handled by a separate entity can be easily justified, for liability, as well as efficiency reasons.  Asset protection advisors have long advocated keeping business operations in separate self contained entities in order to shield each one's assets from lawsuits and other legal actions caused by the other.  With doctors and crazy malpractice suits, doing this would make perfect sense, without any consideration of the tax benefits.

I hope this helps you understand this issue a little better. Your own personal professional tax advisor can help you how any of these ideas and concepts would apply to your unique circumstances.

Kerry Kerstetter

Follow-Up:

Yes this does help and I do agree with you that too many taxpayers dont do enough to lower their tax burdens.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/14/2006 12:53:00 PM Send this post: