Reduce Taxes with S-Corps and C-Corps
Submitted by Desmond Wealth Management, Inc. on July 13th, 2019If you are a business owner, using corporations to help you reduce taxes and provide increased legal liability protection is a viable plan. Choosing which type of corporation depends on many factors, and some of those factors come down to the tax savings strategies. Here are a few to consider:
Tax Strategies for S-Corps
- No federal corporate level income tax (or double taxation). This means that all of your income is reported and taxed on your personal return, instead of being taxed at both the corporate level and your personal level.
- Reduce self-employment tax. If you operate as a sole-proprietorship (or an LLC in many cases), all of its income will be subject to self-employment tax. If you put the business into an S Corporation, none of the net income will be subject to self-employment tax. However, there is a catch. You don’t want to risk your distributions being reclassified by the IRS as wages, or you’ll be subject to big penalties, but you can take a reasonable salary, and take the profits as a distribution. Wage and income strategies are key in tax planning.
- Deduct S-Corp losses against other personal income. In an S corporation, if you have losses, you can typically take a tax deduction on your individual tax return to offset other income. Of course there are rules and restrictions around this, but in a C-corp, those losses must stay with the corporation.
- Income shifting to family members. An S-corporation can be an excellent vehicle for splitting income amongst family members through gift or sales of stock. This tool can assist in shifting wealth from one generation to the next.
Tax Strategies for C-Corps
- Deduct your medical expenses. Using a Section 125 Medical Plan allows your employees (i.e. you and your spouse) to deduct your medical expenses inside the corporation. If you deduct them on your personal return, you must have enough expenses to reach higher than the 10% AGI floor before you even start to have a deductible expense. This doesn’t work for S-Corps because the owners are not considered ‘employees’ for this purpose.
- Pay less taxes at certain levels. Although C-Corps are taxed at the corporate level, the tax rates and brackets are lower at certain levels than for individuals. With tax planning, you can keep some of the income in the corporation and pay less taxes, rather than distributing it to yourself and paying the higher personal income tax rates.
- Reduce self-employment tax. By creating a defined benefit plan for your corporate employees, you can not only put more money into your retirement account, you can reduce the amount of self-employment taxes by reducing your salary to make these larger contributions.
- Defer paying taxes. With many C-Corporations, you can elect to have a fiscal year-end which allows you to plan your wages and income into varying years to defer taxes, or offset other tax events in a particular year.
These strategies require advanced planning in order to reduce the amount of taxes going to the government verses the amount of savings you can put into your pocket. By planning ahead, and looking at these strategies throughout the year, you can pay less taxes and put more into your retirement savings.
Give us a call to see how we can help you select the best way to minimize taxes and increase your retirement savings (925) 932-1994.