Q:

Subject: question about S vs C corps

Kerry,

I have a question based on what you said in your S vs C Corps topic.

“My philosophy is to look at the overall tax picture for individuals and their companies by smoothing income over the personal (1040) and corporate (1120) tax returns.  For 2000, a married couple's 15% tax bracket ends at $43,850 of taxable income.  It then jumps to 28%, almost double the rate.  However, if you consider that the couple's C corporation has its own $50,000 15% bracket, their overall combined 15% bracket has more than doubled to $93,850.  That alone can save several thousands of dollars per year in income taxes.”

Wouldn’t the couple also have to pay an additional 15% dividend tax on whatever $ they took out of the corp’s $50,000 net income? I am not well-versed in taxation – please explain.

 Thank you,

A:

There are a couple of basic concepts that apply here.

I tell my C corp clients to avoid the term "Dividends" because we only want to take money out as a deductible expense for the corp that will avoid double taxation.

Corporations have potentially eternal life; so there is no need to zero out their bank accounts.

You should work with an experienced tax pro to see how these would apply to your particular situation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2006 06:33:00 PM Send this post: