06 February, 2017
Tax planning is like football. Planners (offense) look to exploit weaknesses in the Tax Code, while the IRS (defense) constantly seeks to plug any holes. This is why the Internal Revenue Code is so complicated – because it resembles a leaky dike fortified with duct tape to plug the holes. Tax planning tends to elevate form over substance. For small businesses, entity selection is a tactical choice of form and most small businesses today choose to do business as either a limited liability company (taxed as a partnership) or as an S-corporation. Few small businesses choose to do business as a C-corporation because it is more expensive. C-corporations are subject to high marginal tax rates and two levels of tax (first as the corporate level and second at the shareholder level). Naturally enough, most people prefer to pay less, not more tax. So the C-corporation is relatively out of favor. C-corporations are taxed just like individuals at marginal rates. The lowest marginal rate for a C-corporations is fifteen (15%) percent on the first fifty thousand ($50,000.00) dollars of income, but the rates quickly climb to thirty-nine (39%) percent. A smart tax planner once figured out that a business could divide its income between multiple C-corporations to take advantage of the lowest marginal rate (15%). For example, if a corporation has $500,000 of net profit, it may try to run the income through ten (10) separate C-corporations (paying no more than $50,000 to each), which would reduce the effective marginal rate from thirty-nine (39%) percent to fifteen (15%) percent. This mauneuver worked for a while, but the IRS blocked the play through subsequent legislation (IRC Sections 1561 and 1551). A series of ten corporations under common ownership is now considered a “controlled group,” which has to aggregate income and only gets one fifteen (15%) percent bracket spread across the entire controlled group. All of this may change if corporate tax rates are reduced to fifteen (15%) or twenty (20%) percent as promised by the new Trump administration. If that happens, corporations may return to favor as a preferred choice of form for small businesses. Unfortunately, professionals, such as doctors, lawyers or accountants, may be left out of the equation. Under current law, corporations which render professional services (such as law and medicine) are deemed “personal service corporations” (“PSC”) which are taxed at a flat rate of thirty-five (35%) percent. If corporate tax rates are reduced, the PSC rules would also have to change in order to yield tax savings for professionals. Theus Law Offices provides a complete range of business planning and litigation services. If you or your business are facing a tax problem or business issue and need a Louisiana tax attorney or business lawyer in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe or elsewhere in Louisiana, let our tax and business attorneys help you.
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