Income splitting. The government taxes the first $50,000 of corporate profits at a lower rate than the individual owners’ tax rates. Therefore, you one should split your C corporation’s income between yourself (or your S Corp) and the C corporation. This allows you to pay taxes on the salary you pay yourself at your individual income rate, while the profits retained in the corporation are taxed at the lower corporate tax rate.
Tax Brackets-With our country’s “progressive” tax rate structure, it is very expensive to have too much income on any one tax return. For individuals, the listed rates go from 10% to 35%, with actual effective rates much higher due to the phasing out of so many tax breaks as income increases. With an S corp, all of the corporation’s income flows right onto the 1040 returns of the shareholders, pushing them up into higher tax brackets. A C corporation has its own progressive rate table starting at 15% on the first $50,000 of net income. 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 2011, a married couple’s 15% tax bracket ends at $69,000 of taxable income. It then jumps to 25%, 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 $119,000. That alone can save several thousands of dollars per year in income taxes.
As described elsewhere, the ability to use the rapid form of depreciation is much more lucrative for owners of C corporations because they can literally multiply their total deduction by splitting their purchases of business assets among their different business entities With an S corp, the Section 179 deduction is limited to just the one amount.
Countering the evil Rich Attack
As I have described on many occasions, “Mean Testing” (penalizing the evil rich) is a growing trend in this country, and is most often measured by the AGI on your 1040. People over certain thresholds lose tax breaks and have to pay in more taxes and penalties than others do. Income from an S corp will just make things worse. Income on a C corp will not be counted in most mean testing.
Investment Earnings can be preserved by using the “dividends received” exclusion. C corporations can reap stock dividends from other unrelated corporations at a 30 percent tax rate. Therefore, it can be a smart move for your C corporation to invest in this manner, especially if you don’t need to take large dividends out of the company for a while. At this moment, Verizon is paying about a 5% dividend. This means a effective tax rate of 0.75% of this dividend income!
Less auditing. A corporation that reports less than $100,000 of gross receipts per year is only one-third as likely to face an IRS audit as an unincorporated business with similar income. Keep in mind, however, that there is no foolproof way to avoid an audit; don’t use this as an excuse to play fast and loose with tax rules.
One of the benefits of a corporation is having it provide lucrative employee benefits that are deductible by the corp and tax free to the employees. Medical, life insurance, education, childcare, and retirement plans are just a few of the types of benefits available. On a side by side comparison, the tax free status of some of these plans is much less generous for people owning more than 2% of S corporation stock.
C corporations also enjoy certain tax advantages associated with fringe benefits:
- Your corporation can also implement a medical reimbursement plan that allows you to deduct medical expenses that insurance won’t cover. Sole proprietors and partners cannot deduct medical expenses in this manner.
- More to be listed later.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.
Latest posts by David Conley (see all)
- A Tax Court decision you’re going to hate:
Joint Returns Valid Despite Wife's Forged Signature- September 5, 2018
- Tax Reform in a Picture Format:
10 Major areas of tax reform via our infographic- August 31, 2018
- Hiring your child in your business:
It pays to keep it all in the family- August 10, 2018