First of all, we don’t have a new tax plan yet. (At least it’s not law yet, at the time of writing this blog.) Please keep that in mind through the rest of the blog.
If a new plan is passed that seems in line with the general theme of the S Corporation flow through lower income tax and the C Corporation income tax rate.
Generally, with a business we want to see income flow through your S Corporation first. You will take a salary from the company. You may have to have 70% of the total income taxed like salary if the House bill passes. There is also another option to use a return on the fair market value of your equity. Hold that thought. If this passes, one of the strategies will be to increase the FMV of equity as quickly as possible. The theory is that an investor expects a return on his investment. Of course, none of this works if you’re a personal service company. An earlier post talked about some of the ways to flunk the personal service tax. If you’re not sure on that, go back a few weeks and read that post. This is important and information
One of the new things from the House and the Senate give a small business exclusion from the mandatory income component from flow through entities. None of this matters if your net income from the business is $150,000.
Let’s break that down. Let’s say you and your partner have a business that nets $250,000 per year. You have an issue now with meeting all of the new tests and calculations. If you separate your income so that you each have $125,000 into two separate businesses, you qualify. Of course, this is all subject to what the final definitions say.
One thing we’ve used in the past that is likely to still be a successful is to either upstream or sidestream income from your S Corp to a C Corp. The C Corporation pays tax itself and is not a flow through entity, so it’s a successful way to reduce your income and distribution from the S Corp. Upstreaming happens when the C Corporation provides a service or sells product to the S Corp. The payment to the C Corp is income for the C Corp and a deduction for the S Corp. Another strategy is to sidestream income by moving a separate income stream from your S Corp to the C Corp.
The goal behind these strategies is to lower the income that is in the S Corp so that you fall below the $150K taxable income amount.
Keep watch here to find the latest in tax strategies for business owners and real estate investors.