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If you are a single member S-Corp and taxable income is over…

If you are a single...
If you are a single member S-Corp and taxable income is over $315K and business is a service industry so would not get the 20% deduction under new tax reform, would changing to a C-Corp help pay less taxes assuming you pay yourself the same salary? I would think not because the C Corp may be taxed at the new lower Corp tax rate, but the left over profit if distributed to the the only shareholder would be taxed as a dividend which would in effect be the same as if the profits of the S Corp were taxed at the shareholder's individual tax rate. Is this correct?
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Answered in 10 minutes by:
1/2/2018
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,488
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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That's right. The owners would need either to leave $ in the C-Crop for expansion, R&D, etc (as most large companies do) OR take advantage of some of the non-taxable fringe benefits available to C-Corps.

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Also, however, if the dividend qualifies as a qualified dividend, there would be the lower long term capital gain rate.

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Customer reply replied 1 month ago
Ok. So let say it can be a qualified dividend and the amount of the net profit of the C Corp is $500K.The C Corp would pay $500k*21% and then if the shareholder is in the highest tax bracket so he would pay $500K x 20% as a dividend rate. This would mean that he is paying a total of 40.5% tax rather than if he stayed as an S-Corp and paid the lower 37% individual tax rate. Am I correct?

That's right ... This tax cut does essentially two things: Changes the taxation for large corporations who don't pay out NEARLY all of their profit, and lowers the individual rates a bit .

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Also completely eliminates the corporate AMT .. also a real killer for large corporations.

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There are some other things, but these bubble to the top as the real, structural changes. This doesn't help the little guy that's making a half a million.

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DO remember however, that the salary from the c-corp is an expense, thereby lowering the profit .. don't count it twice

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Customer reply replied 1 month ago
If you leave the money there instead of taking the dividend and made investments in the stock market or other things is that OK or does it need to be reinvested in the actual Corp?

Oh sure. A corporation can invest in anything it wants.

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Remember that this is a completely separate entity (both at the state corporate law level AND - different from the passthroughs - and from a tax perspective as well)

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The C-Corp can spend money (an expense on the 1120) buy things and own them (add to it's balance sheet), etc.

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It's only when the transaction is between the owner and the C-Corp that we have taxable events for both.

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Customer reply replied 1 month ago
I get that thanks. Even if the money is kept in the C Corp if the shareholder wants the profit at some point they will need to take a dividend which will be taxed.

Yep, that's the double taxation aspect of C-Corps

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 13,488
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane and 87 other Tax Specialists are ready to help you
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Thanks Michael

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Lane
Lane
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