Back 20+ years ago (1996, to be exact), I co-authored a book called “Inc. and Grow Rich.” Great title, but the Napoleon Hill Foundation didn’t think so. (Too similar to “Think and Grow Rich”) So, the title got changed to “Incorporate & Grow Rich.”
It’s still burning up the sales charts on Amazon and just one of the books that I want to get updated as soon as possible. Tax laws in the past 20+ years have dramatically changed what you can and cannot do with a C Corporation.
Some basics still apply though. There is no such thing as “one size fits all” when it comes to business structures.
When I got some fame because of “Inc. and Grow Rich”, I spoke at a lot of different seminars and events about the tax breaks you can get by being smart with the entities you choose. Since those events were often sponsored by companies that made their living selling C Corporations, the other program speakers usually were pushing C Corps as the be-all and end-all.
I did not.
In fact, I will never forget having lunch with some of the participants and a young man told me his story. He was so excited. He had taken the first step toward financial freedom! He had paid the fee (by charging his credit card, because he didn’t have the money) to start a C Corporation. He was ready for the money to start rolling in.
I proceeded cautiously.
“What business do you have?”
“What? What do you mean? I have a C Corporation! I can write off everything I spend money on.”
Turns out that’s what he had taken away from the other speakers. With a C Corp, everything becomes tax deductible.
Let me stop right here. That’s not true.
IF you have a business and there is a business purpose to your expenses, you’ll get write-offs. In fact, a lot of them! And it turns out that positioned correctly a LOT of expenses really are write offs, but first you need a business.
And then you need to show business purpose.
If all you’re doing is generating a loss, you don’t really have a viable business model. Of course, many businesses, probably most in fact, start off with losses. If you’re in a pass-through business structure, those losses can be used to offset your other income. (There are a few other requirements, such as sufficient basis and your active involvement in the business.)
But you need a pass-through entity to deduct those losses.
For start-ups, the C Corp is generally not the best structure.
In this case, my advice to him was to get a business going ASAP and make sure he could pass the hobby loss rules so he could deduct losses. And then with his C Corporation, elect S Corp treatment. You can do that with a C Corporation easily before year end. After year end, it’s still possible, there are just a few more hoops to jump through.
Are you ready for a C Corporation? Typically, when your income puts you into the top federal tax brackets, a C Corp starts to look attractive. The C Corporation can also be a good idea if you want better tax-free benefits foremployee/owners than an S Corporation can give you.
That’s what was true before the 2017 Tax Cuts and Jobs Act (Trump Tax Plan) dramatically changed strategies for business entities. What you used to be a great idea for a business structure might not be such a great idea now. And the C Corporation, out of favor for a long time with the “mass market” for business structures is suddenly the darling (or will be, as soon as business owners understand how this can cut their tax bill in half or more!)
Our next coaching class will be Wednesday July 17, 2019 at 5 pm Pacific. We’re talking about the basics of C Corporations, when to use them, when to avoid them and some of the former “traps” that simply aren’t traps now due to changes with the Trump Tax Plan.
You can go to https://www.ustaxaid.com/coaching-program/ for more information on the twice monthly live coaching.