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I am a shareholder in a company that is expecting a gross

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profit of $1million. What is...
I am a shareholder in a company that is expecting a gross profit of $1million. What is the most tax efficient way to pass on this profit to shareholders? Share buy-back? Dividends seems really tax inefficient.
Submitted: 2 years ago.Category: Tax
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11/10/2015
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4,730
Experience: 35 years tax experience, including four years at a Big 4 firm.
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Hi from just answer. I'm PDtax, and can assist.

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Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago

Dividends are not tax efficient. Buybacks stink for smaller corps, and can be dividends if done pro rata.

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Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago

I try to use deductible expenses to bonus out the extra income. Even wages work, if you are employed by the business.

Directors fees, deferred comp arrangements, all work.

Thanks for asking at just answer. Positive feedback is appreciated. I'm PDtax.

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Customer reply replied 2 years ago
If I bonus out the income I will be taxed at ordinary income rates, which are the highest, no? What would be the best for me
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago

Since there is a corresponding tax deduction for bonus, there is only one tax to pay. The income is earned. What you keep after tax is the test.

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Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago

Dividends are taxed twice. Buybacks could get capital gain treatment, but the income is still taxed. Any deductible payment to you has a lower effective tax rate, as you create both a deduction and income.

I also suggested deferred comp as a way to get a tax deduction now, and not report the income currently.

The best way to measure is to consider your options for 100,000 or so of the income. Wages, directors fees, deferred comp, or the like are your best options.

PDtax

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Customer reply replied 2 years ago
Could you use numbers as an example? To show the difference in bonus vs divide sends vs share buyback etc
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 2 years ago

Let's say your corporation is about to accept $500,000 in income. The combined Federal and state tax rate at the corporate level might be 40%. That leaves $300,000 left in the corporation. Now, let's assume you want some, or all, of that $500,000 before the tax man gets it.

Let's say you pay your self the $500,000 in bonus. The corporation pays $0 tax, and you pay some 33%, or $165,000. You clear $335,000 after taxes.

How about a buyback? The corporation has $300,000 to buy shares. Let's say they buy 10% of the company shares for $300,000. The remaining owners see their ownership percentages increase by 11% (1/.9), but you get no cash.

As a dividend, let's say the corporation pays out all of the after tax income, $300,000, as dividends. You receive and pay 33%, or $99,000, in taxes. You get to keep $201,000.

Thanks again from Just Answer. I'm PDtax.

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