12 Tax Strategies – When To Use a C Corporation?

Diane Kennedy and I just completed a webinar on 12 Tax Strategies for 2013 Tax Savings. The replay is available for a short time over at www.ustaxaid.com/12strategies. Most of the strategies are very time-sensitive, so if you want to move forward, now is the time to contact us.

This week I wanted to talk more about these strategies and answer some of the questions from participants we didn’t get to on the call. If anything you read this week brings on another question, please ask away!

When Should You Use a C Corporation?

C Corporations are kind of like pressure valves. On the webinar slide, you can see what I mean. The income bucket on the left has different taxable layers. As you make more, you move up through the taxable layers. So, the goal is to siphon off income from the left side, to keep you in the lower taxable layers.

The reason this is so effective is because C Corporation tax rates can be lower than your personal return rates. The first $50,000 in taxable income in a C Corporation is subject to a 15% tax. If you scoop that out of your 35% tax layer on the left, for example, you’ve just saved yourself 20% tax – you have gone from paying 35 cents on the dollar to 15 cents on the dollar.

C Corporations can also choose their own fiscal year-ends. If I have a business with a 12/31 year-end, I can set up a C Corporation, or an LLC electing C Corporation status, and use something like a June 30th year-end. I’ve just bought myself 6 months before the next tax return is due, to do some planning, at least for all of the income I have just moved out of my main business.

SO when does this work? Well, first you have to have a reason to have the C Corporation, and have it interact with your other businesses. It needs to be a real reason too. Using a C Corporation simply to lower your taxes used to work, but the feds enacted new laws a few years back that specifically disallowed that type of transaction. Your C Corporation has to have something to offer.

With many of our clients, it’s not too hard. Say there’s a husband-wife operation, where he does the marketing, and she does the product or service fulfillment. Marketing is something that could be outsourced. You could have a 3rd party do your marketing. Same with Internet-based operations, where one of you is an SEO guru, and can create 10,000 backlinks and get your page to rank with little effort. That aspect of your business can be carved out and into its own structure, and the new structure can contract with your existing business to receive a fee for providing that service.

I know this sounds like upstreaming, our old-fashioned method of pulling money from one structure to another, but it isn’t, at least when you look closely. It’s actually closer to side-streaming. Upstreaming often meant creating a shell business in a tax-friendly state, which did not do anything for an existing business. With the side-streaming model, the two businesses work together, but they don’t have to, and the second business could offer those same services to other companies.

Take marketing, for example. Marketing is important to a business, it’s true. But marketing has no bearing on how I provide business formation services to my clients. It helps to attract clients, certainly – but it is not something that is directly involved in in the creation of business structures.

Bookkeeping is another example. Having the books maintained is very important for my business. But when you come to me for an incorporation, whether or not my books are up to date doesn’t influence the service I provide to you.

At Smart Business Incorporation, we specialize in helping investors and business owners develop structures to run their businesses, protect their assets and keep as much of their earnings as possible. If you want to know how to best structure your next business, visit our website or drop us an email at info@smartbusinessincorporation.com. We’ll be glad to help.

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