Discussion:Ever okay to just stay a C Corp?
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Ever okay to just stay a C Corp?
| 2 July 2007 | |
| I feel like I am doing such a great dis-service (sp?) to a client that has always (~20 years) been a C corp and cannot seem to convince myself that coverting to S is better. About $500,000 in RE, profit year after year, taking max rent (and it's alot!) and keeping salaries at 'reasonable' level. RE continues to build. SHs keep taking cash out and I finally stopped S/H L/R a couple of years ago and we're imputing interest, have documented notes, etc and are 'whittling away' at the loans (via loan repayments and/or reclass to salary/dividends). Cash out is now dividends, though at max 15% (plus SIT), that 'double taxation' irks me. I've done projection/planning and, at their individual income level (salaries, rental income, little interest, C corp dividends is about it) they're paying less in tax (individual, including dividends vs. C corp - we keep in 15%) by not converting to S and including that ~$50,000 in personal income. My biggest concern is aren't we just 'spinning our wheels' as RE continues to grow at a greater rate than we can justify taking dividends? I hate this scenario and keep trying to convince myself that it is simply, they're making the money they owe the taxes. Is there a question here or just inviting some welcome comments...Thanks. | |
| 2 July 2007 | |
| Any plans to sell either the corporation or the property? If not, maybe just leave it like it is and let the heirs inherit the stock at stepped-up basis .... of course, that assumes the estate tax and Sec 1014 will come back after 2009, which may be risky .... | |
Bottom Line (talk|edits) said: | 2 July 2007 |
| Sometimes a C is the right answer. Sounds like you've done your analysis. I suggest you review it every year and keep a copy in your file (CYA). A few questions though. Have you gotten any "nastygrams" from the IRS about RE in excess of $350,000? Don't know what state you're in but are you considering the state taxes in the mix? A assume this C-corp only has one stockholder. Occasionally I have one entity pay more tax so the other can pay significantly less. I look at the total tax effect for the "family" which assuming only one stockholder would be the C-corp and the individual. | |
Death&Taxes (talk|edits) said: | 2 July 2007 |
| Fringe benefits! Besides the medical reimbursement plan and the health insurance, time to get them into LTC insurance. Look now to get them into a defined benefit plan: depending on their salary you can get some humungous numbers sheltered if they are over 48 years of age, all the while taking a salary.
The two best clients I ever had were a husband-wife with two separate businesses, and each a C Corp set up by accountants in NYC in the late 70s. My term for them was 'incorporated checkbooks.' That is there were no real assets; they worked from home where the space was too small for a meaningful 'home office' and spent much of their time on the road. Yes, when I took over they had large loan accounts which were never really paid down substantially but one passed IRS muster 9 years later. The husband passed away in early 2002 from a brain tumor at 68; his wife was winding down her corporation when cancer took her a year later, so in fairness, I never did see what would happen come time to close up shop, but from 1988 through death, I never had a qualm about their structure. I had one advantage; each was a fiscal year corporation, which made planning easier. So C's can be viable, but if they came to me today to ask about incorporating, I would had them make the S Election | |
Bottom Line (talk|edits) said: | 2 July 2007 |
| Thanks D&T for reminding me about the fringes. I meant to include them in my post but forgot. | |
| 2 July 2007 | |
| LJ I think D&T had some very good ideas for you. I would also encourage you to put the client in contact with a very good fee based financial planner who is well versed in retirement plans for small businesses.
Depending on the amount of employees and the goals of the shareholders a good retirement plan can help save a lot of taxes. Maybe a 412i plan maybe a good call. This is of course if they don't already have a retirement plan in place. But you can always switch plans. Good Luck! | |
| July 2, 2007 | |
| Like you, Lynne, I've got a couple C's leftover, and they've been C's and likely will remain C's right or wrong. It's rarely the right entity, but it is for one client, who has heavy medical costs each year, and so can take the full write off. The other, a fiscal year, which is a pain to switch, potential BIG tax issues because of a half mil in inventory...etc. etc. etc. So I just leave it be. With RE inside tho', I'd probably feel like I had to move on the S or else you're really creating added tax at some point in the future. If you can get to ten years without them selling the RE, you've escaped a big chunk of tax anyway. | |
| July 2, 2007 | |
| I think LJA's "RE" = Retained Earnings not Real Estate.
LJA, they are probably paying less taxes remaining a C-Corp, even with the dividends. Even more so, if they are going to lose some fringes benefits by switching to S. You may want to convince client to take more dividends and pay down that SH Receivable faster. Especially while we have the 15% bracket on dividends. Who knows what's going to happen with that. | |
John of PA (talk|edits) said: | 2 July 2007 |
| No problem with a C Corp if you pay out the annual profit in saleries and therefore do not cummulate Retained Earnings. (provided salaries are reasonable) More is allowed in fringe benefit packages also, with a C Corp (ex: Med Reimb Plan, Disability Ins.) Also C Corp. probably more flexible if you ever sell the business. | |
| July 2, 2007 | |
| Ohhh. Never mind then. And yeah, pay some dividends while rates are cheap. | |
Bottom Line (talk|edits) said: | 2 July 2007 |
| I interpreted RE as Retained Earnings also | |
