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Lev -- Wondering about going forward for 2018...Thing about…

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Hi Lev -- Wondering about...
Hi Lev -- Wondering about going forward for 2018...Thing about changing our Delaware corp from an S-Corp to a new C-Corp and then do a corresponding change in California where we are a Foreign Corporation. The C-Corp should then be taxed at the new Federal rate of 21% and and the CA rate of 8.84%--but by paying the Corporate rate, we would be saving the 1.5% they access on the Sub-S pass-through.As a retired Nevada resident now, I believe that my wife & I (minority shareholders) could be paid our full stock dividends without incurring any CA tax liability, and no Nevada taxes because no set income tax. Because the income would be taxed double on the Federal level, we could choose to leave part of our dividends in the C-Corp for investment and business growth tax deferred... Is this correct?As a California resident, my son could choose not to pay out any dividends to himself, and let them grow, invested in the business, essentially CA-tax deferred on the personal level. Is this also correct?
Submitted: 3 months ago.Category: Tax
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Answered in 14 minutes by:
12/29/2017
Tax Professional: Lev, Tax Advisor replied 3 months ago
Lev
Lev, Tax Advisor
Category: Tax
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Customer reply replied 3 months ago
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Tax Professional: Lev, Tax Advisor replied 3 months ago

The issue with C-corportaion will be that you will have two classes of shares - and one class will receive dividends while another class owned by your son will not receive dividends.

While that is possible - you still will have that in mind and when C-corporation will be registered - that must be in writing.

You are correct - there will be double taxation on the federal level.

There is a limit of the amount the corporation could have from retained income.

The law provides that most corporations can accumulate up to $250,000 in retained earnings without triggering the accumulated earning tax...

For service-related businesses in accounting, engineering, health, law or architecture, the standard falls to $150,000

But if the money will be invested in business assets - that is not an issue.

Otherwise - your assumptions are correct.

Please elaborate if needed.

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Customer reply replied 3 months ago
Thanks, ***** ***** shouldn't need two classes on stock because my son will be taking some dividends too--and they can have more favorable treatment than regular income if the dividends are "Qualified"--i.e., taxed at the max capital gains rate of $20% vs the highest new individual bracket rate of 37%. Correct? But how will California treat these "qualified" dividends? As capital gains too with a reduced rate?And to avoid the Accumulated Earnings Tax, if a business owner plans to develop a new line of business or expand his marketing and operations, retained earnings can be used for that... Correct? The key is to have a feasible, well-documented plan for the earnings that have been retained--beyond the typical $250,000 allowed. Right?
Tax Professional: Lev, Tax Advisor replied 3 months ago

If you have one class of stocks - dividend distribution must be made to ALL shares of the same class - And you will not be able to choose - to take or not to take dividends.

You are correct - qualified dividends are taxes at reduced tax rates - as long term capital gains.

In California - there is no different tax treatment.

Regarding accumulated earning issue - yes - you are correct - you would need to have a plan and start implementing that plan - that is just an issue to consider.

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