S vs C Corp - theory and reality check needed

[BHoffman]

Assume $335k in taxable corporate profit and $200k in shareholder salary, filing Head of Household:

$335k Corporate profits = $113,900 corporate tax
$200k Shareholder salary = $48,955 individual tax
$162,855 total tax CCorp

$335k SCorp profits + $200k salary = $535k
$163,210 total tax SCorp

I'm not trying to be dead on the money and realize the individual tax isn't right, but it would be consistent anyway so I don't think that matters. This is theoretical.

I am basically trying to determine if there is a great difference in tax between a C Corp and an S Corp if profits are around $335k and salary is around $200k.

Thanks for any comments.

[Nashville]

Critical Question

Everything appears to be sound in your approach to both scenarios, but it would help if you would provide one tidbit of helpful information:

**Is the $335,000 in profits BEFORE or AFTER payment of a $200,000 salary?*** From your examples it appears to be AFTER.

Another thing to consider in the decision to decide C or S -- we have no guarantee that the capital gains rate will remain at 15%. when the C corp profits are ultimately distributed to the shareholder...

[BHoffman]

Hi Nashville - $335 AFTER salary deduction.

Agreed on the capital gains preferred tax rate - I see that going away. I've heard either bonusing the Retained Earnings out to the shareholders as payroll or else setting up a defined benefit plan are good workarounds.

Another consideration would be fringe benefits.

And, of course, the dreaded BIG tax....

[BHoffman]

Timing of conversion

My research indicates the following:

A good time for a C Corp to convert to an S Corp is basically when:

Retained earnings are low, but not negative AND

Accounts receivable is not much different than accounts payable.

A good way to lower the retained earnings is to issue payroll bonuses to the shareholders in the C Corp, assuming their salaries are over the SS cap. The lower tiers of both the corporate tax rates AND the individual tax rates would apply.

A good way to get AR and AP close together would be to accelerate collections and delay payments.

How am I doing? Thanks for any comments. These conversions have mystified me and I want to get the basics straight.

[Edsel]

Back to the Example

The Capital gains on dividends has been discussed, but was not a factor in your calculation to begin the thread. This means your comparison is accurate only if the owner never takes any money (beyond salary) out of the corporation.

Assume he takes $100,000 out in dividends. This being over and above his salary.

Your calculation under the S corporation remains the same at $163,210.

Total tax on C corporation:
Corporate tax per your calculation: $113,900
Owners tax on Salary: $ 48,955
Owners tax on Dividends $ 15,000
Total all taxes under C Corp $177,855

Two other factors bearing on this:
1) We cannot assume the Dividend rate will remain at 15% (already discussed). This would have the effect of making the C corporation even more disadvantageous.
2) The owner may declare a "bonus" instead of dividends, assuming he can do so within reason. If this happens, he will not enjoy a rate as low as 15%, but the $100,000 would be deductible by the corporation.

[BHoffman]

Thanks for your input. I think bonuses should be in lieu of dividends.