Help understanding C-Corp

[scottr]

Hi!

I just formed a C-Corp for my business in 2016 and it has been pretty confusing so far but from what i've read it sounds like there can be some advantages.

Anyways, I have a question.

My Accountant has told me I need to put myself on payroll.  Still trying to figure out how this works, BUT my question is this:

If I want to pay myself out some income as "dividends" on top of the payroll - are these dividends "qualified?"

The reason I am asking is, when I decide to "retire" or taper off - If I were to only pay myself a salary equal to the standard deduction, could I then also pay myself out in Dividends from my C-Corp and essentially pay no tax on these up to the 15% tax bracket limit (based on income?)

Hope that makes sense!  Any help is much appreciated!

[Proud Foot]

As long as you meet the requirements for a Qualified Dividend this should work.

What was the reasoning you chose a C-Corp over a LLC or Sole-Proprietorship for your business? Taxes aside, do you know how much more it is costing you (in $ and time) to be a C-Corp? Unless there is more to your photo business that you haven't mentioned I fail to see how there would be some advantages to being a C-Corp.

I am sure @SeattleCPA could provide a lot more/better insight.

[scottr]

C corp was recommended by accountant because of advantages of "income splitting."  Now with new tax proposals (21% max tax) also seems to be advantageous.  Took me a long time to swallow the cool aid on this but this non-conventional approach seems to have some possible advantages for the income level I have been at.

Scott

[ISawTheLight]

If you created the corporation in 2016 and have owned it ever since, the dividends being paid out will qualify for the reduced tax rate.  Please note that when you pay the dividends out, you (or your accountant) should do a 1099-DIV just like the one you get from Schwab / Fidelity / Vanguard.

C Corp can be advantageous.  S Corp can be advantageous.  Whichever is best depends on your particular facts and circumstances.

[scottr]

Thanks for all the responses.

So just so I understand correctly.

My C-Corp was formed June 1st 2016

If i am paying myself on payroll - I can also pay myself out some dividends as well correct?

I'm still confused though - are these dividends "qualified?" - that is, if my personal income remains in the 10-15% bracket will there be any tax on the personal level to these dividends?

The dividends would be coming from the cash I have been accumulating in my C-corp (and corp taxes have already been paid on these funds)

any help clarifying is much appreciated.

Thanks!



 

[ISawTheLight]

You can pay yourself a dividend at the same time you are paying yourself a salary.  The dividends should be 'qualified'.  You should get the same preferential tax treatment on these dividends that you do on qualified dividends from any publicly traded company / mutual fund.

[scottr]

Ok great.  Thank you.  I am just trying to plan ahead and figure out ways to avoid double taxation when it finally comes time to start paying myself the funds accumulated in my c-corp.

One more question - The money is sitting as cash right now.  Is it bad to open a brokerage account for my c-corp.  I have heard investments are taxed differently but cant seem to find a straight answer on this

[Proud Foot]

If your income is at a level where the C-Corp is advantageous then way to go! You are seriously killing it with your business!

ETA: What has your accountant said about opening a brokerage account and having investments within the company?

[SeattleCPA]

Usually, it doesn't make sense to operate as a C corp. At any level of profit, you'll pay less tax (overall) with an S corp usually.

Also, as of 1/1/2018, a pass-thru entity like an S corp provides you with the Sec. 199A deduction which means you don't pay tax potentially on the last 20% of your business profit.

Remember this about the C corp 21% rate (also new as of 1/1/2018).. you pay that rate... and then when you later distribute the money again, you pay the qualified dividends tax rate...and in a worst case scenario the Obamacare tax.

BTW, it'd be interesting to know why your accountant recommended a C corp because he or she may based on the details of your specific situation know something special about your business. Also the rules have changed a lot since 2016.

P.S. The idea that you'd use a C corp has a personal holding company is problematic. Some investment income is taxed less preferentially in a C corp. Also, there are accumulated earnings taxes to understand and worry about.

[skuzuker28]

It sounds like you have a handle on the basics, but it is a little concerning that you didn't have a firmer grasp of this before choosing the C-Corporation structure.  As you seem to be learning, you need to have a more strategic state of mind when using a C-Corp as an operating entity due to the potential double-tax.  There are certain things you can do with/in a C-Corp that you can't do otherwise, but you want to make sure you want to take full advantage of those.

Might be worth sitting down with your CPA to go over this subject.  Like SeattleCPA said, they might be better able to advise you since they are more familiar with your particular circumstances.

[scottr]

Thanks all for the responses.

I am confused by some of the specifics/details of the c-corp vs s-corp - namely how to get my money out without getting taxed twice etc (beyond the deductions for paying myself a salary).

However; two accountants looked at my finances and both recommended a C-Corp.

That being said, since I like to understand everything I am still left with some confusion.

[grantmeaname]

However; two accountants looked at my finances and both recommended a C-Corp.

Unless you provide any financial details in this thread, we have no way to know whether or not that is the case and anything we say would just be useless speculation.

That being said, since I like to understand everything I am still left with some confusion.

Can you be a little bit more specific about what is still unclear to you?