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Corporate & Partnership Tax - Instructor: Dwight Drake Check The Box Game Pre – 1997 - Big fear was taxable as C corp association - The 6-4 structuring.

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Presentation on theme: "Corporate & Partnership Tax - Instructor: Dwight Drake Check The Box Game Pre – 1997 - Big fear was taxable as C corp association - The 6-4 structuring."— Presentation transcript:

1 Corporate & Partnership Tax - Instructor: Dwight Drake Check The Box Game Pre – Big fear was taxable as C corp association - The 6-4 structuring factors: Associates, Business Objective, Continuity of Life, Central Management, Limited Liability, Free Interest Transferability Post Non-corporate single owners - Check the box election - 60 month rule - Requires entity separate from owners

2 Corporate & Partnership Tax - Instructor: Dwight Drake The Ambiguous Joint Venture A function of poor planning or no planning Gives IRS clear shot to choose which way to go. Factors: - An agreement showing business venture intent - Joint control and ownership - Contribution of property or services by each party - Sharing of profits

3 Corporate & Partnership Tax - Instructor: Dwight Drake C Corp Bracket Racquet First 50k 15% Next 25k 25% Next 9 mill, 925k 34% Over 10 mill 35% Plus… If over 100k, less of 5% of excess or 11.75k If over 15 mill, lesser of 3% of excess or 100k. If qualified personal service corporation, flat 35%

4 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake C Corp Losses Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Losses C Corp Shareholders Carry BackCarry Forward Never Pass Thru

5 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake C Corp Losses Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Losses C Corp Shareholders Carry BackCarry Forward Never Pass Thru

6 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake Basis Game Corporation’s Inside Basis in Assets Shareholder’s Outside Basis in Assets ContributionsDistributions

7 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake C Corp Non-Basis Booster Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

8 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake S Corp Basis Adjustments Per 1367 ContributionsDistributionsIncomeLosses Basis Up Basis Down

9 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake Pass-Thru Entity Basis Booster Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com

10 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake Problem P. 31 (a) Tax liability: 15% of 50k = 7,500 25% of 25k = 6,250 34% of 925k = 314,500 First bubble = 11,750 Tax 340,000 (Note: Flat 34% Rate)

11 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake Problem P. 31 (b) Dividends totaling $660,000 distributed: Shareholders 20% = 132,000 Corporate tax = 340,000 Total tax hit 472,000. Combined tax rate 47.2% Note: Without Bush favorable capital gain rate, due to expire at the end of 2010, Shareholder tax goes to 40% combined rate and total tax hit goes to 60.4%.

12 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake Problem P. 31 (c) Compensation of $1 million paid to Emil and Betty Shareholders 40% = 400,000 Corporate tax = 0 Total income tax hit = 400,000. Combined tax rate 40% But this not all - there’s another tax that no one ever wants to talk about: The Payroll Tax.

13 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake Problem P. 31 (c) Payroll Tax: 15.3% of first 106k per person (2009 Amount). 2.9% on excess per person. Half deductible by corp. Impact in this situation: Payroll taxes 52,360 Shareholder income tax 400,000 Corporate tax 0 Total income tax hit = 452,360. Combined tax rate 45.2%

14 Corporate & Partnership Tax - Instructor: Dwight Drake LLM Corporate Tax Instructor: Dwight Drake Problem P. 31 (d) Note impact if pass-thru S Corp: - No corporate tax - No payroll tax Total Tax 400,000 (40 %)

15 Corporate & Partnership Tax - Instructor: Dwight Drake Federal Payroll Tax 15.3 % of first $106,000 of earned income 2.9% of excess earned income

16 Corporate & Partnership Tax - Instructor: Dwight Drake 100k Corporate Earnings C Corp C Corp Dividend Bailout Compensation Bailout Corp Income Tax 22,250 0 Shareholder Income Tax 8,947 18,188 Total Taxes 31,197 18,188 Comp Wins! Right?

17 Corporate & Partnership Tax - Instructor: Dwight Drake 100k Corporate Earnings C Corp C Corp Dividend Bailout Compensation Bailout Corp Income Tax 22,250 0 Shareholder Income Tax 8,947 18,188 Gorilla Payroll Tax 0 14,580 Total Taxes 31,197 32,768 Wrong!

18 Corporate & Partnership Tax - Instructor: Dwight Drake Rush Limbaugh website: Only the Rich Pay Taxes! IRS Latest Data: - Top 1% Pay More Than a Third Taxes - Top 25% Pay Over 83.88%

19 Corporate & Partnership Tax - Instructor: Dwight Drake Rich vs. Non-Rich Non-Rich Rich Self employment income 60,000 0 S Corp earnings 0 300,000 Dividends 0 150,000 Capital gains 0 150,000 Total Income 60, , x Income taxes 2, , x Taxes as % of income 4.24% 18.14%

20 Corporate & Partnership Tax - Instructor: Dwight Drake Rich vs. Non-Rich Non-Rich Rich Self employment income 60,000 0 S Corp earnings 0 300,000 Dividends 0 150,000 Capital gains 0 150,000 Total Income 60, , x Income taxes 2, , x Gorilla payroll taxes 9,180 0 Total taxes 11, ,892 Taxes as % of income 19.54% 18.14%

21 Corporate & Partnership Tax - Instructor: Dwight Drake 16 Key Factors That Impact Entity Choice 1.Future Sale Potential 2.Diversified Ownership Interests 3.Owner Limited Liability 4.Earnings Bail-Out Potential 5.Conversion Availability 6.The Bracket Racquet 7.Loss Utilization 8.Fringe Benefits 9.Going Public Prospects 10.Tax Deferrals 11.Passive Activity Rules 12.The Alternative Minimum Tax 13.Real Estate 14.Estate Planning 15.Control Rights 16.“Not My Return” Factor


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