Sole proprietorship vs. C corp.

[D'Artagnan]

My client is a consultant. Income has increased to $1200 per day.

I attended a meeting with client and a financial planner. The financial planner is urging a c-corp.

What advantage would there be?

There are no real estate assets to "sell" to the corp.

There is medical insurance and low to average medical expenses.

There are not medical "fringes."

In the years I have done his returns, this client has never had a salary under $100,000, so there is no case for a reduced salary/dividend which would reduce FICA/SE tax.

FP is also counseling that the cost of leasing a house in another city (residential dwelling + home office) can be a corp deduction. I have done some research and am finding litigation on this subject. The new city is about 200 miles away and the temporary residence is necessary for work. Client does not know how long the assignment will last.

I would appreciate any thoughts on the matter.

[Uncle Sam]

Sole Proprietor/C Corp

The first thing I suggest is have the Financial Planner stick to financial planning and keep his mouth shut when it comes to tax law.

Having a corporation entity hold, or pay charges for property that has mixed use of business and personal living creates tax headaches you wish to avoid.

A corporation should not hold appreciable assets (like real estate) because it creates a humongous tax headache upon disposition. That's why real estate is usually held in sole ownership or partnerships and/or LLCs.

You really need to sit down with the client and find out what his future plans are - because you shouldn't be long range tax planning for a temporary situation

[BHoffman]

I don't like it.

Explain double taxation issues to your client and show him your research regarding the house. Advise him to find a CERTIFIED financial planner. My two cents.

[drdino]

Liability

I'm sure the FP is touching on liability protection although agree C corp may not be the best option. Maybe a call to the FP for his reasoning would not be out of order. I like the confidence in recommending a 'Certified' financial planner....there is a huge difference!

[Bees Knees]

Generally I would agree to stay away from a C corporation and tell the FP to stick to his profession.

There are cases, however, where someone making $1,200 a day ($438,000 per year) might save some taxes doing a C corporation.

Without the C corporation, your individual top tax rate hits the 35% bracket. With the C corporation, by paying out wages, which are deductible by the corporation and never taxed to the individual above 35%, you can shift up to $50,000 into the 15% corporation tax bracket. That money gets taxed again to the individual as a dividend, but the dividend rate is also 15%. 15% + 15% = 30%, thus you shifted $50,000 which would normally get taxed at 35% to a 30% bracket. Of course the problem with this is IRS doesn’t like your wage to be based upon only leaving $50,000 in corporate profits each year.

You can also use the graduated tax brackets inside the corporation (15%, 25%, 34%, etc.) to currently pay tax at a lower rate and retain the earnings so the individual does not have to pay double tax on the 15% dividend rate or capital gain rate until years later when the money is eventually distributed.

Like I said, I normally do not like this. I don’t think there is much there to work with from a pure tax bracket point of view. I think the C corporation fringe benefit rules are much more of a reason to do a C corporation rather than simply trying to save a few bucks playing with the $50,000 C corp 15% bracket.

[Lion]

C Corp

I had an LLC client want to incorporate. His lawyer was urging S. I suggested C. He's beyond the early years when there might be a loss he'd want to pass through to his personal returns. His family medical insurance alone was over $25,000. And he does take a large salary and is in the top personal tax bracket. He also leaves money in the company, so would seldom receive dividends, but at 15% that's not a big deal. He takes money out of the company to pay his personal taxes and to pay for personal items while traveling (maybe taking his kids along) and to pay his car lease -- all things easier for me to account for as partnership distributions. But, in an S, they will have to take distributions in the same ratio as ownership. Well, the lawyer was more convincing, so S it is. I still like a C for a closely held corporation that's profitable. Owner/employee can watch near year end to keep profit low and seldom pay dividends, even so having an overall lower tax rate than if all passes through to his personal returns.