C-Corp Bonuses vs. Dividends

Originally Posted by right out of the book

If your S corporation is holding the property and you are sued personally, a judgment creditor may be able to reach your shares in the S corporation and effectively take control of those shares and, through them, control of the S corporation and its assets. For those reasons we recommend that real estate be held in either an LLC or a limited partnership (LP).

Hogwash! I agree with most of the quote you listed except this part of the quote is not true. The author must think that a LLC or LP does not have ownership that could be controled like a S-corp stock could be controled. For the LLC & LP it is usually referred to as units of ownership and "certificates of units owned" are commonly issued just like shares of stock in a S-corp. So bottom line, it is not very likely that a "personal" lawsuit would give control of S-corp shares or LLC units of ownership. At least I have never seen it done unless it is a lawsuit between shareholders over who actually owns what shares.

But I agree that the real estate should be held by a LLC-partnership or LLC-sole proprietor.

[qbnito]

Jack, I have a confusion on my part here while I'm reviewing your posts. I need some real-time numbers.

The C-corp pays a 15% tax on the first $50,000 of profit, when the money is paid out later the shareholder pays a tax depending upon how it is paid out and the tax rate of the 1040 taxpayer.

How much of this is paid out? $50,000? Or 15% of the $50,000, which would be $7,500? That amount will show up on, and be taxed on your personal taxes, and be added to whatever your personal income for the year would be?

If it is paid as a "C-corp dividend" the Corp has paid 15% once and the shareholder is taxed at a max tax rate of 15% on the dividend (so called double tax).

Is this option totally different then the first option here? If so, which option would benefit me?

I wouldn't take the rest as salary, since the amount would be so much it would put me up into a 28% or 33% bracket. That would be ridiculous to do that.

Point is, I'd like to keep my personal 1040 to stay in the 15% bracket by taking as little salary as possible, and yet, keep the company's taxes in the 15% bracket as well. Tell me, if you had your choice of paying 15% overall on personal, and business taxes, and on the other hand you had 28% to 33% to pay, which would you take?

I want to keep as much of my money as I can, hell, my tax money doesn't benefit me as much as it needs to. Just look at the roads.

Originally Posted by RichardOvervold

How much of this is paid out? $50,000? Or 15% of the $50,000, which would be $7,500? That amount will show up on, and be taxed on your personal taxes, and be added to whatever your personal income for the year would be?

If the C-corp has a 2004 profit of $50,000 and wants to keep the $50,000 in the C-corp then the C-corp files its 2004 income tax return 1120 and pays a 15% tax of $7,500 not later than March 15, 2005. The C-corp never again pays income tax on that same $50,000 but the individual will pay tax when it receives the money. The individual does not report in 2004 or pay any 1040 tax on this profit because the individual did not receive the income in 2004 (if you were a S-corp you would have 1040 tax in 2004 on the $50,000).

At some point in time the individual is going to want that $50,000 cash and therefore takes it out of the C-corp by way of salary (1040 tax brackets) or dividends (15% max 1040 tax) and pays an individual 1040 income tax on what is received. If the C-corp does not pay out the $50,000 before it liquidates/terminates, then the shareholder receives it as liquidating capital gains taxed at a max 1040 tax of 15%.

Warning: A C-corp is allowed to retain the $50,000 but if the amount retained accumulates to more than $250,000 (150k for certain service companies) the C-corp must pay out dividends unless it can prove it needs the money for operations. Otherwise the C-corp is charged an additional 15% flat tax on the current years earnings every year making a total tax of 30% (15% regular +15% additional).

If in say the year 2006 the C-corp had a bad year and the individual receives the $50,000 as salary the C-corp gets a deduction for the $50,000 against 2006 C-corp income and therefore pays less C-corp tax in 2006 (this in effect saves or gets back the 15% tax originally paid so there is no double tax paid). If the 2004 $50,000 is paid out as dividends (1099Div) in say 2006 the C-corp gets no deduction and the individual reports taxable dividend income on 1040 Sch-B (thus the C-corp paid 15% tax in 2004 and the individual pays 1040 tax in 2006 so a double tax was paid on the same $50,000).


Wheeee!

[qbnito]

Originally Posted by OldJack

If the C-corp has a 2004 profit of $50,000 and wants to keep the $50,000 in the C-corp then the C-corp files its 2004 income tax return 1120 and pays a 15% tax of $7,500 not later than March 15, 2005. The C-corp never again pays income tax on that same $50,000 but the individual will pay tax when it receives the money. The individual does not report in 2004 or pay any 1040 tax on this profit because the individual did not receive the income in 2004 (if you were a S-corp you would have 1040 tax in 2004 on the $50,000).

At some point in time the individual is going to want that $50,000 cash and therefore takes it out of the C-corp by way of salary (1040 tax brackets) or dividends (15% max 1040 tax) and pays an individual 1040 income tax on what is received. If the C-corp does not pay out the $50,000 before it liquidates/terminates, then the shareholder receives it as liquidating capital gains taxed at a max 1040 tax of 15%.

Warning: A C-corp is allowed to retain the $50,000 but if the amount retained accumulates to more than $250,000 (150k for certain service companies) the C-corp must pay out dividends unless it can prove it needs the money for operations. Otherwise the C-corp is charged an additional 15% flat tax on the current years earnings every year making a total tax of 30% (15% regular +15% additional).

If in say the year 2006 the C-corp had a bad year and the individual receives the $50,000 as salary the C-corp gets a deduction for the $50,000 against 2006 C-corp income and therefore pays less C-corp tax in 2006 (this in effect saves or gets back the 15% tax originally paid so there is no double tax paid). If the 2004 $50,000 is paid out as dividends (1099Div) in say 2006 the C-corp gets no deduction and the individual reports taxable dividend income on 1040 Sch-B (thus the C-corp paid 15% tax in 2004 and the individual pays 1040 tax in 2006 so a double tax was paid on the same $50,000).


Wheeee!

Okay, try this on for size. I can grow my business at any point I want, without end. So I can actually, take a small 1040 salary that I just need for home expenses. Use the rest to grow the business with marketing costs (writeoffs) like mad to keep the profit down. At the end of the year, I can use that shifting method because from the time I "market" my product, I don't get paid for about 1 and a half months. I could easily have $15,000 in extra marketing costs that I haven't received my payments for. Hense, shifting legally. Lets say that I want to buy a rental property. Can I pay myself dividends of whatever it would cost as far as downpayment/closing costs, and pay for the home that way into another LLC?

Relax bud, I'll get it down one of these days.

The C-corp can pay you (the shareholder) dividends at any time it has money to do so and you are willing to pay the 1040 tax on the same. What you do with the dividend money after you get the dividend check is up to you. Stick it in your pocket, give it to me, or invest in a LLC is all up to you.

I would suggest that your 1040 salary should be the max that keeps you in the 1040 15% bracket or less.

See ya next year!

[qbnito]

Originally Posted by OldJack

The C-corp can pay you (the shareholder) dividends at any time it has money to do so and you are willing to pay the 1040 tax on the same. What you do with the dividend money after you get the dividend check is up to you. Stick it in your pocket, give it to me, or invest in a LLC is all up to you.

I would suggest that your 1040 salary should be the max that keeps you in the 1040 15% bracket or less.

See ya next year!

The dividend paid to me at any time is only taxed at 15% regardless, right? As long as it's not run into my 1040 bracket income, that's fine.

[qbnito]

If you'd like to know what I chose...

S-Corp!

Reason(s):
1) If I choose to take distributions, even though taxed on a 1040 personal bracket. I don't pay SS, Medicare, or State (I'm in Florida). Federal tax is all I pay on my distributions, which I will use to pay my personal/home office bills. Then my company pays me back on the business side of the bills as write offs, and the reimbursement should be non-taxable, and a write off.

Just one reason. CPA sold me on it.

Jack, if you see anything in this post that doesn't make sense. Slap some sense into me, and make it correct.

What can I say Richard.. that I have not said before which noone remembers. With an S-corp it is the profit for the year that is taxed on that years 1040.. not the distributions. An yes, distributions are not taxed because it is the profit that is taxed. The reason you have to take a resonable salary is to pay the 15.3% payroll tax so the old people will get their social security checks. If you elect to not take a resonable salary the IRS will figure one for you and give you a bill for 3 years worth of payroll taxes ( 15.3% of 3 years profit plus 25% penalty) and then you will have to prove that their computation is wrong. If your CPA disagrees tell him to look at the last couple of years tax court cases and reconsider his malpractice insurance coverage.

[qbnito]

Hmmmm.. He told me that the distributions are taxed, but only on the Federal level. I would think that $20,000 salary is reasonable.

Now what you're saying is that if I choose to be taxed on the profits of the business, I stand to have SS, and Medicare taxed?

Also, one more quick question. Distributions (I didn't get this question in to him) are added onto the Salary's "Federal taxable income"? Meaning that if I take $20,000 in salary, and I take another $80,000 in distributions, in the end, my 1040 will be taxed Federally at $100,000. Or separately, once at $20,000 and 15%, then another one of $80,000 and 33%? My guess is at $100,000 and 33% overall. But of course, the $80,000 doesn't have the dreaded SS, and Medicare. And my $20,000 has SS, and Medicare attached to it on the business side, and personal side.

Are you saying that $20,000 is too low a salary?

This is ridiculous, I hate taxes, yet I can talk taxes all day long.

Originally Posted by RichardOvervold

Hmmmm.. He told me that the distributions are taxed, but only on the Federal level. I would think that $20,000 salary is reasonable.

S-corp distributions are not taxed because it is the total profit for the year tha is subject to income tax on his 1040 tax return. If the profit for the year was say $100,000 and he took $40,000 in cash distributions for the year, his income tax return would be taxed on the $100,000. If he took $140,000 cash distributions for the year his income tax return would still be taxed on $100,000 (unless the extra $40,000 was more than his investment basis).

Originally Posted by RichardOvervold

Now what you're saying is that if I choose to be taxed on the profits of the business, I stand to have SS, and Medicare taxed?

As an S-corp you do not have a choice, the profit is subject to income tax.. period. Your choice is only how much salary (reasonable) you take and how much Tax-free cash distributions you want to take.

Originally Posted by RichardOvervold

Also, one more quick question. Distributions (I didn't get this question in to him) are added onto the Salary's "Federal taxable income"? Meaning that if I take $20,000 in salary, and I take another $80,000 in distributions, in the end, my 1040 will be taxed Federally at $100,000. Or separately, once at $20,000 and 15%, then another one of $80,000 and 33%? My guess is at $100,000 and 33% overall. But of course, the $80,000 doesn't have the dreaded SS, and Medicare. And my $20,000 has SS, and Medicare attached to it on the business side, and personal side.

You will pay 1040 tax on your W2 gross salary plus the profit of the S-corp after the S-corp deduction for your W2 salary.

Originally Posted by RichardOvervold

Are you saying that $20,000 is too low a salary?

This is ridiculous, I hate taxes, yet I can talk taxes all day long.

I have no way of knowing what salary is reasonable for your business activity. It would probably be what you would expect to be paid if you were working for someone else in your same kind of business.

Note item #8 in the IRS warning:

Originally Posted by IRS Warning. IR-2004-47, April 5, 2004

IRS Warns Businesses, Individuals to Watch for Questionable Employment Tax Practices

IR-2004-47, April 5, 2004

WASHINGTON — The Internal Revenue Service issued a consumer alert today for eight schemes where federal employment taxes are not properly withheld or paid by employers from their employees’ paychecks. The IRS alert to business owners and other taxpayers follows a string of recent convictions and court rulings involving employment tax schemes.

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The IRS takes a variety of steps to combat employment tax non-compliance. The agency has a number of civil actions it can take like audits and filing tax liens against property the taxpayer owns. In addition to civil actions, IRS Criminal Investigation investigates and refers for prosecution individuals and businesses that have willfully attempted to avoid filing and paying employment taxes. These efforts have led to significant criminal convictions resulting in incarceration and fines.

During the past three years, 117 individuals have been sentenced to confinement in a federal prison, a halfway house or home detention for criminal violations related to employment taxes. Approximately 77 percent of the persons sentenced for evading employment taxes served an average of 17 months confinement and were ordered to make restitution to the government for the taxes evaded, plus interest and penalties.

Recent examples of employment tax prosecutions can be found at IRS.gov. See the link for Significant Employment Tax Case Summaries, below.

The IRS urges all businesses to resist the temptation to become involved in or victimized by unlawful activities. The eight most common types of employment tax non-compliance include:

1. Pyramiding. "Pyramiding" of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS..........
2. Unreliable Third Party Payers.....
3. Frivolous Arguments........
4. Offshore Employee Leasing.........
5. Misclassifying worker status......
6. Paying Employees in Cash.....
7. Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns.....
8. S Corporation Officers Compensation Treated as Corporate Distributions. In an effort to avoid employment taxes, some S Corporations are improperly treating officer compensation as a corporate distribution instead of wages or salary. By law, officers are employees of the corporation for employment tax purposes and compensation they receive for their services is subject to employment taxes.
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