Pretty soon everybody’s going to be talking about the “new” solution for 2013 tax increases – the C Corporation. Of course, it’s really nothing new. C Corporations have been around along time.
They are a unique type of structure though and that means some unusual laws. One of the challenges is something called a personal service company. If you have a personal service company(PSC) and it’s a C Corporation, you’ll pay more tax and have less options.
At a recent webinar we did (you can find it at http://www.CCorporationTax.com ) we talked about the personal service issue for C Corporations. We couldn’t get to all the questions, so Megan and I are answering them here and at her blog. Here’s one of the questions:
“My husband and I have a personal service S Corp that earns around $200K. Is there an earning level where we would most benefit form a C Corp?”
The first thing to check out is whether you really do have a personal service company.
Personal services activities are activities in the field of health (including veterinarians), law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, and consulting.
If your business does indeed have those activities, the next thing to consider is if there is a way to flunk the test.
For example, can over 5% of the stock be owned by someone who does not provide the personal service activities? If so, that’s a flunk.
Can over 5% of the total employee time (including the employee/owner) be spent in paid activities that are not related to the personal service activity? If so, that’s a flunk too.
If there is no way around the PSC designation, then consider whether all of the income in the company needs to stay in the company. Are there other sources of revenue that could sent to another company? Is there Intellectual Property (IP) that could be moved out of the PSC?
This is a complicated part of law and it’s best to have a qualified expert helping you create the best strategy.