The Biggest Challenge with C Corporations (And It’s Not What You Think)

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If you haven’t heard about C Corporations yet, you will soon. That is, if you’re serious about saving tax money.

The problem with C Corporation tax strategies is that if you weren’t in business prior to 1986, then you probably aren’t up on how they work, and when they don’t. In 1986, the Tax Reform Act changed how and when we work with C Corporations.

That was when we all moved to S Corporations as the ‘go to’ entity for businesses. They are easier and worked better for professionals.

But now that C Corporation tax rates are going to end up much lower then individual rates, it’s time to give C Corporations another shot.

The biggest challenge with C Corporations right now is overcoming the personal service corp designation.

A C Corporation offers fantastic tax-free benefits to owner/employees and a separate tax rate, which allows you to move income from your much higher rate to a C Corporation’s 15% (or maybe even lower if we see some of the current political rhetoric turn into action).

That is unless you’re considered a personal service corporation. Some of the personal service corp traps are for lawyers, medical professionals, accountants, engineers and consultants.
If you’re considered a personal service corporation, then the IRS is going to hit you with a higher tax rate.

How do you avoid it? Well, we cover this and other C Corporation traps as part of the C Corporation Tax Trap LINK to

Here’s a brief overview of one of the tips we use to overcome the dreaded personal service tax trap in C corporations:

  • Flunk the personal service corporation test. You can do this by one of two ways: (1) 5% or more of the stock in the company is owned by someone who does not provide personal services that meet the test. And/or (2) 5% or more of the total hours spent by all employees in the company are spent in activities that are not personal services.

It’s all about strategy. As more people learn about C Corporations, you’ll start hearing more about this as a great tax saving tool. Why wait? Start now, and start saving now.

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