A C Corporation is the only business structure that pays tax itself. Other entities like S Corporations and partnerships are flow-through entities so that the taxable income or loss flows through to your personal return. The C Corporation has its own tax brackets and its own tax. It doesn’t matter how much other income you have.
It’s always been a successful strategy to use a C Corporation when your income is at the highest personal tax bracket. Take some of the business income that would normally flow through to you and have it instead go to a C Corporation. The first $50,000 is taxed at 15%. Or at least that’s the way it was.
Now, C Corporation have a flat rate of 21%. That’s 16% less than the top individual tax rate. It’s getting interesting.
Plus, C Corporations offer their employee/owners a lot better tax-free benefits than other flow-through entities do.
There has been a problem, though. The professional service corporation (PSC) has not been able to take advantage of the same great tax rates. In fact, a PSC Corp had a flat rate of 35%. It had to have a year end of 12/31 and the accumulated earnings tax had a much lower threshold.
One of those 3 potential issues has now been resolved. Now the PSC C Corp has the same tax rate as a C Corp.
This alone is a HUGE change for how we’ve handled tax strategies for PSCs in the past. Before, we wanted to have all of the income drawn out in the form of salary. Now, it’s good to leave some in, especially if you don’t need all the salary to live on. Let the C Corp accumulate some profit, pay the 21% tax and then loan the money to an LLC for investment purposes. You’re now using less-taxed money to invest.
Note that this strategy only works if your individual tax bracket is higher than 21%. Of course, you can still use a PSC C Corp if it provides benefit plans that you want to put in place.
There are a world of strategies that have just become available with the new Tax Cuts and Job Act. Don’t miss out! Make sure you’re tax strategy is up to date.
We offer tax consultations and twice monthly live coaching on tax and asset protection strategies. Not sure which is right for you? Contact Us.