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Author: limitdown Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121146  
Subject: Income splitting - legal but what about an audit Date: 8/1/2004 5:51 PM
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I have a c corporation that is making A LOT more money this year than I planned. Even if I pay it all out to myself and my wife in the form of salary in order to avoid double-taxation, I will still have to pay payroll taxes, etc. on these huge amounts.

It's too late in the year to convert it to an s corp, so I was thinking of setting up a new and separate s corp. Then just have my c corp pay my new s corp huge "consulting" or other fees, which would effectively move the money into my new s corp and allow it to flow to my personal tax return and avoid payroll taxes.

Technically this is legal, but would it hold up if I got audited? What would I need to do to make the "consulting" fees legit in the case of an audit?

My CPA is lame ... he says "oh no you can't do that!" when I know for a fact that you can. I need to find a more aggressive CPA...
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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72696 of 121146
Subject: Re: Income splitting - legal but what about an a Date: 8/1/2004 6:10 PM
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Certainly the structure you suggest is legal. However, the flaw lies in how you think the money received by the "S" corp will be treated. You will be required to pay some form of commensurate wages out of the "S" to its employees as well; as a result, the some of the revenue, but definitely not all of the revenue received by the "S" can flow through to Schedule E.

TheBadger


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Author: limitdown Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72697 of 121146
Subject: Re: Income splitting - legal but what about an a Date: 8/1/2004 7:28 PM
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Thanks for the reply. You're right, but the wages would be a small percentage of the total. For example, I might move over 500k into the S Corp and then pay myself a reasonable administrative salary of 30k, etc. So that's one option I guess...

Does anyone have any other ideas about how to deal with excess profits in a C-corp aside from the standard deductions, SEP, etc. in order to reduce taxes? If I knew this little business was going to make this kind of money I don't think I would have set it up as a C-corp.

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Author: Donna405 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72698 of 121146
Subject: Re: Income splitting - legal but what about an a Date: 8/1/2004 7:30 PM
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Have you set up a retirement program within your C corp for much of that excess income. There are many ways you can lower your tax liability within the corporate structure. Think of retirement or profit sharing, medical insurance, HSA (Health Savings Plan), etc.

Donna

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Author: limitdown Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72699 of 121146
Subject: Re: Income splitting - legal but what about an a Date: 8/1/2004 7:44 PM
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Yeah we have already set-up a health and medical plan, etc. The problem with retirement "stuff" is that it's all long-term and I want access to the money now - not when I'm 60 years old. I already have a separate long-term retirement plan that is going according to schedule. With this particular corp I need to get as much of the money into my own personal accounts as I can, and pay as little taxes as possible...

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72701 of 121146
Subject: Re: Income splitting - legal but what about an a Date: 8/1/2004 8:34 PM
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(limitdown:)Yeah we have already set-up a health and medical plan, etc. The problem with retirement "stuff" is that it's all long-term and I want access to the money now - not when I'm 60 years old. I already have a separate long-term retirement plan that is going according to schedule. With this particular corp I need to get as much of the money into my own personal accounts as I can, and pay as little taxes as possible...
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Then you don't have a lot of options, other than to bonus it out to yourself - which will be taxed to you at your own personal tax rates, the same as if you were an S-Corp. The only additional tax is the Medicare tax of 2.9%, since you will be over the limit for Social Security wages.

You may find that you minimize taxes by leaving enough profit in the company to make the corporate taxable income about $75,000 - where the federal corporate tax rate goes from 25% to 34%.

But you need to be talking to your accountant some more. This most distinguised and intellectual forum is no substitute for professional expertise - and with your situation, you can't afford not to avail yourself of it.

-Bill


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Author: limitdown Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72703 of 121146
Subject: Re: Income splitting - legal but what about an a Date: 8/1/2004 9:03 PM
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The problem with retaining earnings is that it is useless in the corporation, and when you combine the corporate tax on those profits plus the extra tax I'll have to pay when I want to take it out, I'll end up paying even more in taxes than if I just took it out now. Hmm.

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