When Does a C Corporation Make Sense?

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There will be a lot of changes coming over the next 4 years to our tax laws. There are more provisions expiring over this time period then ever before in the history of our country.

So, we’ve been spending more time than normal looking at these provisions and the tax proposals from Congress, Senate and the Presidential candidates. One thing it looks like everybody agrees on: the C Corporation tax rate must be cut.

There currently isn’t a huge difference at the high end between individual income tax and corporate income tax rates. The biggest benefit today that you can get with a C Corporation is the first $50,000 of income which is taxed at 15% (versus top individual income tax rate of 35%) and with employee benefit plans. For someone who would use the employee benefits plans, such as someone with high medical expenses, the C Corporation can make a lot of sense. If a small business owner is at the highest personal tax bracket, moving their company, or better one part of their company, to a C Corporation can save $10,000.

If the new tax proposals become law, though, we’ll see HUGE advantages for C Corporations. Why? It’s so that we can keep American companies from going overseas. Other developed nations charge about 10% on their corporations. In fact, the US has the second highest corporate tax rate. With this big difference, companies are moving their money and businesses offshore. That means a big problem for the US economy.

Lowering the corporate tax rate means that we would be more competitive in the world. But, here’s where I am very excited It also means that it has NEVER been a better time to start a business, or if you have a business, start your strategy now to be ready to move part of it to a C Corporation.

Of course, we don’t know how the tax laws will end up, but it might even be possible that this will be the answer for all the people who have appreciating assets stuck inside a C Corporation. A 10% rate is lower than the current long-term capital gains rate for individuals. There is still the issue of double taxation when you get the property out of the C Corporation, but good strategies can help with that as well.

Should you move to a C Corp today? Perhaps. Should you start a business if you don’t already have one? YES!!! Emphatically yes. Should you position your existing business to be able to move quickly to a C Corp if the law does go that way? Absolutely.

The Future C Corp strategy is something that I will discussing at the upcoming Loopholes of the Rich charity weekend on July 19-20 in Phoenix, AZ.

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