Income Splitting Strategy with C Corporations

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hidden-fallsC Corporations, when used correctly, can provide a huge tax savings. The problem is that most people don’t really understand C Corporations. They went out of style in 1986, thanks to the 1986 Tax Reform Act, but there are changes coming this year that will put them right back in style.

The problem is that C Corporations are complicated. And if you are working with a CPA who is younger than 48 years old, then chances are they’ve never worked much with them. I guess that’s an advantage to working with someone who has a little more mileage on them.

I just finished up my 31st tax season, so I can tell you – I’ve seen C Corporations before. Today I want to give you a very specific tax strategy if you have a business with income over $350,000. Even though I’m being very specific, it doesn’t mean you should go out and try to implement this yourself. There are tricks to making sure you do this right. One of the biggest challenges with a C Corporation is once set in motion, they are hard and expensive to unwind. There can be some unintended taxes that hit you hard if you’re not careful. A good tax strategist and experienced CPA or tax attorney can help you set it up right.

The strategy today assumes that a married couple has a high income business. The business is in an S Corporation and they’ve been working both in and on the business, so there is a clear passive income stream.

They also follow our strategies to create what we call side streaming sources of revenue. These are revenue streams that may be slightly related to your business but are completely separate from the core purpose of your business. For example, my clients at USTaxAid Services are tax clients. They come to us for tax strategies, tax implementation, tax compliance and tax representation. But they also may come to us for solutions for how to interpret the business results they’re getting. In other words, they need some help from a virtual CFO. Let’s say we have a software program that allows business owners to input their data and pinpoint their most powerful leverage points.

That software program and its sales can go in another company, separate from USTaxAid Services. And let’s say we also move sales of information products to another company.

We’ve now created some sidestream income that can be moved away from the original S Corporation. Using this example, the S Corporation income all flows through to the owner’s personal tax return. Currently, the highest federal rate is 35%, but that is likely going up to 39.6% soon. And that doesn’t take into account the state income tax and any surtaxes that might be assessed.

But just using 35%, let’s say we can move $50,000 from the personal return to a C Corporation. The first $50,000 in a C Corporation is taxed at 15%. The tax savings just from federal at the current rate would be $10,000. Not bad. But remember we created two separate side stream income sources. So that’s another $10,000. And then, let’s say we also find that we have more employee benefits available. These are the things that wouldn’t be deductible as an S Corporation employee/shareholder. Let’s say that’s another $20,000 in deductions, providing $7,000 in additional tax savings.

So, with very little work and in just the course of one blog, you’ve just set yourself up to pay $27,000 less in tax this year. And $27,000 less next year. And the next. And the next. That is unless the personal income tax rate goes up as expected and the corporate income tax rate goes down as expected. Based on the current numbers, you can expect to save something closer $50,000 per year. Each and every year.

So, you tell me – Is it time to find out more about C Corporations?

One Comment

  1. Randy Lueder says:

    how do you get around the ‘controlled group’ classification with those additional ‘C’ corps?

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