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2012 Y/E tax planning for shareholders of C corps and S corps

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    2012 Y/E tax planning for shareholders of C corps and S corps

    The reelection of President Obama means it is now less likely that the so-called "Bush tax cuts" will be extended for everyone. They may be continued for middle-class taxpayers, but even that is uncertain. Accordingly, dividends are likely to resume being taxed as ordinary income, at rates up to 39.6%, plus the new additional 3.8% tax for higher income taxpayers.

    In view of this possibility shareholders of C corps as well as shareholders of S corps that were previously C corps and that have undistributed E&P from their C corp days, should seriously consider paying out all of that undistributed E&P NLT 12/31/2012. This may be the best and last time for many years to come to distribute those earnings and have them taxed to the shareholders at a 15% tax rate ... or even 0% in some cases.

    For C corps the payment of dividends is simple and straightforward. For S corps the distribution can be made in one of three ways, with the options accommodating all levels of available cash flow:

    1. Distribute cash equal to the S corp's balance of its accumulated adjustments account (AAA) plus the balance of its E&P;

    2. Elect under Regs. §1.1368-1(f)(2) to reverse the normal ordering rule and distribute E&P first, and then AAA. This saves on the required cash outlay if the S corp has a significant positive balance in its AAA; or

    3. Elect under Regs. §1.1368-1(f)(3) to make a deemed dividend of the E&P balance. This requires no cash outlay. Instead, all or part of the E&P account is deemed distributed to the shareholders, who are then treated as having recontributed the amounts back to the S corp. This gives shareholders the added benefit of an increased stock basis, which may allow the shareholder to utilize flow-through losses allocated from the corporation.

    The three points listed above were copied, with minor editing, from the following web page:
    Tax (Photo credit: 401(K) 2012) After nearly two years of examining the tax policies of every serious potential Presidential candidate -- and enduring countless malicious attacks because I continuously failed to include Ron Paul among that group -- my analysis can at long last have a singular focus, as?we finally have [...]

    This same link contains additional tax planning ideas ... six in all ... which many of the visitors to this forum would find well worth reading.
    Roland Slugg
    "I do what I can."