Is your corporate strategy up to date? Don’t answer too quickly! You may actually find that your current tax strategy is going to cost you big time in taxes. The Trump Tax Plan has made pervasive changes to the tax code, and the strategies we need.
Here’s how a C Corporation could cost you if you use the wrong strategy. This is actually Strategy #76 in “Taxmageddon 2018: How to Brace for the Trump Tax Plan” now available through www.Taxmageddon2018.com.
Dual Corporations vs Single C Corporation.
Let’s say that you have a flow through business that currently nets you $400,000. With other income and not very many deductions, you are above the taxable income threshold of $315,000/$157,500 (married, filing jointly or single). (That has to do with the new 20% pass through income threshold and the income limitation for that.
Let’s assume that this is an example of a service business, so you also have the second threshold of $415,000/$207,500 (married, filing jointly or single). And we’ll also assume that you have taxable income that not only puts you above the first threshold but also the second threshold. We have assumed that the other taxable income is not subject to payroll taxes, so we can keep the calculation clean.
That means that you can’t take advantage of the 20% income reduction on the pass through income since you have a service business and your taxable income puts you above the second threshold.
If you don’t need every penny of that $400,000 (less taxes of course) to live, there is another option.
You can set up a C Corporation to provide some work for the S Corporation (upstream strategy) or take over a separate side income that currently is within the S Corp that you transfer over to the C Corp (side stream strategy). More on those strategies in Taxmageddon 2018, following this strategy.
For purposes of this, let’s say that you can move $150,000 to a C Corporation. That would be enough to qualify you for the 20% income reduction on all of your pass-through income. The pass-through income is now $250,000. ($400,000 – $150,000).
Your C Corporation income is $150,000. NOTE: You may also have tax-free benefits, which would further reduce the C Corporation income and reduce your tax.
You have $250,000 left in the S Corporation. That’s the pass-through income.
You determine a reasonable salary would be $100,000. That leaves you with $150,000 of pass-through income which is eligible for the 20% income reduction of $30,000 (20% of $150,000). Your taxable pass-through income would be reduced to $120,000.
In this example, we assumed that you would receive 40% of the pass-through income as salary. If we use that same assumption for the S Corporation pass-through income before the C Corporation, your salary would have been $160,000 (40% x $400,000)
Let’s look at the savings to date:
Payroll taxes: $4,034 saved ($100,000 salary vs $160,000 salary)
Federal tax: Prior to C Corporation: $128,000 (assuming highest tax bracket of 32%)
With the dual corp strategy: $52,800 (24% tax bracket x ($100,000 + $120,000) for your personal return) The tax bracket dropped because $150,000 of income came off the personal return.
$31,500 (21% x $150,000) for your corporation. Total tax is $84,300.
Federal tax savings is: $43,700
In total, your tax savings is $47,734, each and every year! Think about that. What will you do with an extra $47,734 each year?
This is why the double corporation strategy works, especially with the new tax plan in place. If you used just an S Corp, you pay more in payroll tax and more in income tax because you lose the 20% pass-through income reduction and you’re at a higher tax rate than you would be with your C Corporation.
If you used just a C Corporation, you would have to pull out a sizable chunk in salary and all of it would be subject to payroll tax.
The dual corp strategy gives you the best of both worlds.
When you pick up your copy of Taxmageddon 2018 at www.Taxmageddon2018.com make sure you turn to Chapter 16 and register your book. That will unlock $1499 worth of bonuses and membership in a free Insider’s Only forum for Taxmageddon readers.