One of the questions we got at our FREE webinar “12 Tax-Busting Strategies Before Year End” that we couldn’t get to was:
“I am building a personal home using my taxed personal income. I am a real estate broker. Do you have suggestions on how to use my S Corp income to finish building my home?”
The question really comes down to, “How can you get money out of your S Corp and not pay tax?”
The answer isn’t as simple as it might sound. An S Corporation is a flow through entity. As an owner, you have to draw out a reasonable salary from a profitable S Corp. If you don’t, you’re just asking for an audit and the IRS may decide that all distributions you’ve taken are subject to payroll tax, penalties and interest. If you pay yourself a reasonable salary, you’ll greatly reduce the possible downside.
After the salary, you then have a choice on whether you take money out in the form of a distribution or leave it in the company. It doesn’t matter when it comes to taxes. The money you pull out is not taxed. Your profit from the company is taxed.
So, the easy answer is “Your distributions aren’t taxed. Take all you want (or have).”
But if you match your distributions to profit, it may look like the money you take out of your company is taxed. In other words if you have a profit of $100,000 after salary, you take $100,000 in distributions, then your distributions are taxed. But that’s just because it happens to be that you took the profit as distribution. If you took nothing out, but made $100,000, you’d pay taxes on the profit.
If you took out $200,000 and made $100,000, you’d pay tax on the profit of $100,000.
So, the easy answer is actually the right answer. But, I think what you’re really asking is how can you reduce the tax you pay on your S Corporation. In that case, please take a look at some of the webinars we’ve done, like the 12 Tax-Busting Strategies. You’ll see ideas for reducing your taxable income on your business.
If you didn’t sign up for the webinar, you can view the replays of this and other webinars at http://www.USTaxAid.com/Insiders-Only as part of the Insider’s Club.