Tax motivations to switch to an S-Corp from a C-Corp...


T

Tripp Knightly

I realize the decision to choose / switch S over C is more
than just current-year tax liability & avoiding double tax,
but I want to understand the basic tradeoff / breakpoint for
current year tax minimization between the 2 structures.

Suppose a C Corp which I own virtually all of has pre-tax
net income of $200K.

I am not an employee of any kind at this C corp.

My choice is via C-Corp to get income as dividends, which
will have been taxed at the corporate level and then at 15%
personal (the Corp qualifies for 15% - it's not an
investment holding company or REIT etc.), or under S-Corp I
can get the $200K passed through to me as ordinary income
since S Corps don't / can't pay dividends (and I have $50K
of other, non-dividend income.)

Is one structure decidely better regardless of amount of
pre-tax net income of the company or is there a breakpoint
below the other form is preferable?

Are there any tools on the net for this analysis?

Thanks,

- TK
 
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P

Paul A. Thomas

Tripp Knightly said:
My choice is via C-Corp to get income as dividends, which
will have been taxed at the corporate level and then at 15%
personal (the Corp qualifies for 15% - it's not an
investment holding company or REIT etc.),

or under S-Corp I
can get the $200K passed through to me as ordinary income
since S Corps don't / can't pay dividends (and I have $50K
of other, non-dividend income.)
Not if it's already "C" corp income you can't.

"S" corp shareholders are taxed on the earnings of the "S"
corp, regardless of whether or not the profits are paid out.

If there are existing unpaid profits from the "C" corp, that
are still there when you elect "S" status, then when those
profits get paid out, you'll pay tax on those.
 
T

Tripp Knightly

Thanks, clarifying ?'s interspersed below-

Not if it's already "C" corp income you can't.
I think I get what you mean... but *going forward* (ie,
post-conversion) the income of the entity passes through
as ordinary, right?
"S" corp shareholders are taxed on the earnings of the "S"
corp, regardless of whether or not the profits are paid out.

If there are existing unpaid profits from the "C" corp, that
are still there when you elect "S" status, then when those
profits get paid out, you'll pay tax on those.
And of course those earnings retained while "C" could/would be
paid as a "C" dividend even after conversion to "S", right?
 
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G

Gene E. Utterback, EA

Tripp Knightly said:
Thanks, clarifying ?'s interspersed below-
I think I get what you mean... but *going forward* (ie,
post-conversion) the income of the entity passes through
as ordinary, right?
That is correct.
And of course those earnings retained while "C" could/would be
paid as a "C" dividend even after conversion to "S", right?
That too is correct. The tricky part here is keeping the
ordering straight. I won't list the order of distributions
here - primarily because I can never remember the exact
order and I don't have the list in front of me - but it is
important to properly order all distributions to owners of S
corps that were once C corps. And frequently you will find
that the owners don't fully understand the impact of this,
it can be very convoluted.

You also have to be careful when owners take distributions
of profits during the year. It is possible for them to be
taking what they think are distributions from the AAA
account only to find that the company had loss items that
caused some of their distributions to come from C corp E&A.

Be careful,
Gene E. Utterback, EA
 

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