We talk a lot about the good, the bad and the ugly of business structures. But it’s not just about avoiding the bad and ugly (Sole Proprietorships and General Partnerships), it’s also about picking the right business structure for your circumstances.
Most business structures are considered flow-through. That means that the income and losses from the business ultimately end up on your tax return. There is no federal income tax paid at the structure level. Theoretically most states (exception Tennessee) went along with that. But we’re seeing more and more ‘non-tax’ taxes like California’s franchise tax, Texas Margin Tax, Ohio’s CAT and Washington’s B & O.
For purposes of this discussion, though, let’s talk just about federal tax. All entities except the C Corporation are flow-through. That’s one big reason to have a C Corporation. If your income is at the highest tax rate, you can move income from the high tax bracket to the low tax bracket by having the C Corporation pay tax at its own rate. The first $50,000 of taxable income is taxed at 15%. So if your highest personal rate is 35%, you’ll save $10,000 right off the bat by using a C Corporation for $50,000 of the business profit.
The C Corporation also gives the owner/employee a lot more benefits that are deductible. As an example, a lot of our clients love the Medical Expense Reimbursement Plan (MERP) which allows the corporation to take a full deduction, directly against income, for all medical expenses.
The C Corporation can be a little more complicated to set up and run, but in the right situation, it definitely can be a winner!
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