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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10103
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Are you familiar with ROBS? I'm looking into rolling over my

Customer Question

Are you familiar with ROBS? I'm looking into rolling over my IRA into a 401k which will buy the shares of my corporation. I will need to transfer my corporation into a C corp. Other than the double taxation, is there any other tax consequences that I need to be aware of because of the injected funds?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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FIrst of all, it has as of yet not received the full blessing of IRS - No tax court case. Federal District court case or Supreme court case (the only thee venus that settles a tax issue) has spoken to the claims of those that are making money by being the custodians for the plans, based on THEIR interpretation of the tax law.

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Another reason to tread carefully, (as it looks like you're aware), is when it comes time to sell the company, (The only way to get the money - the principal - back you'll you will be taxed twice — first at the corporate level and then at the personal level. And even though normally you'd only pay capital gains tax on the personal level ... now that it's comin back out of a qualified vehicle, it's all ordinary income at the personal level ...THis is why the LLC is the fastest growing business entity out there whose structure allows income to flow untaxed to the owners of the company, who then pay taxes individually but only once.

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And normally with the C-Corp, even with the double taxation, the dividends are taxed at a lower rate ... here, it's ALL ORDINARY income.

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The ROBS "strategy" actually increases the tax bite from 48% to 60% on average.

From a great article on this:

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Here’s an example. Let’s look at what happens if you sell a C corporation for a $1 million gain without using a ROBS strategy.

Gain……………………………………………………………………. $1,000,000

Corporate taxes @ 35%…………………………………………….. 350,000

Gain after corporate taxes ……………………………………….. 650,000

Personal taxes @ 20% (capital gains)…………………………. 130,000

Cash left after taxes………………………………………………….. 520,000

Thus, if you were the owner of this corporation you would have paid 48 percent in total taxes. Now, if this company had been financed through ROBS, you would not have paid 20 percent capital gains taxes at the personal level. Instead, the stock would have been owned through a 401(k) and you would have had to pay 39.6 percent ordinary income taxes. Here’s what that would have looked like:

Gain……………………………………………………………………. $1,000,000

Corporate taxes @ 35%……………………………………………. 350,000

Gain after corporate taxes………………………………………… 650,000

Personal taxes @ 39.6%…………………………………………… 257,400

Cash left after taxes…………………………………………………… 392,600

As you can see, using a ROBS strategy increases the tax bite from 48 percent to a little more than 60 percent. And that’s my point: even if ROBS transactions are legal, the tax implications are significant.

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That's about all I can think of ... I would actually submit to you that the cost of borrowing (something that increases YOUR ROI because you're using OTHER peoples money (financial leverage) is less than the tax costs here. (interest i tax deductible too by the way) NOTHING'S tax deductible inside a qualified plan (no depreciation, no lower capital gains tax, as we've discussed)

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Using an LLC to keep the corporate liability piece in place (you know the new Chrysler entity is an LLC) but provide MUCH more flexibility, less risk of being disallowed completely, and more crtainly is where I'd place my bets...

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But that's just one person's opinion.

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I've been providing financial (tax being a sub-set of that) advice for over thirty years and I can find no colleagues that like this. The only folks I see touting them are the folks who'll make the money, the custodians