4 ms·

If I own a software business that earns 500k-1m a year, currently, I can organize as an LLC and induce pass-thru income that is taxed marginally at ~50% (federa

by abhv 9y ago

If I own a software business that earns 500k-1m a year, currently, I can organize as an LLC and induce pass-thru income that is taxed marginally at ~50% (federal, state, NYC). If I organize as a C-corp, I pay the corporate rate which is also roughly 40%, and I also get double-taxed on salary and any dividends paid to owners. Under these new rules, if a C-corp gets taxed at 15%, there is a strong incentive to pass all income through this C-corp, even after double-taxation.

harryh 9y ago
Well, the disincentive to make it a C-Corp goes down. But your taxes will still be higher that way: 15% + individual taxes vs just individual taxes. I certainly agree that the double taxation issue is a problem and it would be even better if both situations were taxed the same way but I'm not sure what this has to do with tax evasion.
- unclebucknasty 9y ago
  Yeah, but if you're reinvesting in your company, then you might be better of at 15%, even with double-taxation. Currently, pass-through taxation applies to shareholders even if they don't take a distribution. So, rather than have shareholders pay taxes out of pocket, the company pays the dividend just to cover taxes. That's essentially a ~30% tax on the company. If I switch to a C-corp at 15% then I can minimize dividends while in growth mode to minimize double-taxation. I then pay the much lower 15% corporate rate, leaving me with ~15% more to reinvest.
  - harryh 9y ago
    With either setup you can reinvest all of your cash flow thus reducing your profit to zero and your tax burden to zero.
    - unclebucknasty 9y ago
      In theory, sure. But, anyone who has run a pass-through business will tell you that it's a function of timing. If you don't manage to invest it all by the end of the tax year, then it's taxable profit. And, it's nearly impossible to zero out your net by reinvesting it all before some contrived deadline. Even if you could, it is very unlikely that allowing this artificial timeline to drive your investment also happens to represent the best timing or the most efficient allocation of capital.
DenisM 9y ago
You don't get double taxed on salary, salary is expense and offsets income.
542458 9y ago
Actually, it's even worse than that. From Trump's tax plan: > Right now, freelancers, sole proprietors, unincorporated small businesses and pass-through entities are taxed at the high personal income tax rates. [...] The Trump plan addresses this challenge head on with a new business income tax rate within the personal income tax code that matches the 15% corporate tax rate They want to change it so S-corp income gets taxed at 15%, rather than at personal income tax rates. Which is completely crazy, since every CEO in the US will be forming an S-corp and passing all income through it to get a flat 15% "income tax" rate.
- ed_balls 9y ago
  Many countries have that and CEOs don't set up this way. Illegal and bad for PR.
  - harryh 9y ago
    What is an example of a country that is set up this way? This part of the Trump plan I actually do think is completely bonkers so I assume that it won't get anywhere.
dragonwriter 9y ago
> If I organize as a C-corp, I pay the corporate rate which is also roughly 40%, and I also get double-taxed on salary and any dividends paid to owners. Salaries for C-corp employees, including top officers that happen to be major shareholders, are a deductible business expense (well, there may be some issues if they are over $1 million annually, but...), so you only get double taxed on dividends.

by abhv 9y ago

harryh 9y ago

Well, the disincentive to make it a C-Corp goes down. But your taxes will still be higher that way: 15% + individual taxes vs just individual taxes. I certainly agree that the double taxation issue is a problem and it would be even better if both situations were taxed the same way but I'm not sure what this has to do with tax evasion.

unclebucknasty 9y ago
Yeah, but if you're reinvesting in your company, then you might be better of at 15%, even with double-taxation. Currently, pass-through taxation applies to shareholders even if they don't take a distribution. So, rather than have shareholders pay taxes out of pocket, the company pays the dividend just to cover taxes. That's essentially a ~30% tax on the company. If I switch to a C-corp at 15% then I can minimize dividends while in growth mode to minimize double-taxation. I then pay the much lower 15% corporate rate, leaving me with ~15% more to reinvest.
- harryh 9y ago
  With either setup you can reinvest all of your cash flow thus reducing your profit to zero and your tax burden to zero.
  - unclebucknasty 9y ago
    In theory, sure. But, anyone who has run a pass-through business will tell you that it's a function of timing. If you don't manage to invest it all by the end of the tax year, then it's taxable profit. And, it's nearly impossible to zero out your net by reinvesting it all before some contrived deadline. Even if you could, it is very unlikely that allowing this artificial timeline to drive your investment also happens to represent the best timing or the most efficient allocation of capital.

DenisM 9y ago

You don't get double taxed on salary, salary is expense and offsets income.

542458 9y ago

Actually, it's even worse than that. From Trump's tax plan: > Right now, freelancers, sole proprietors, unincorporated small businesses and pass-through entities are taxed at the high personal income tax rates. [...] The Trump plan addresses this challenge head on with a new business income tax rate within the personal income tax code that matches the 15% corporate tax rate They want to change it so S-corp income gets taxed at 15%, rather than at personal income tax rates. Which is completely crazy, since every CEO in the US will be forming an S-corp and passing all income through it to get a flat 15% "income tax" rate.

ed_balls 9y ago
Many countries have that and CEOs don't set up this way. Illegal and bad for PR.
- harryh 9y ago
  What is an example of a country that is set up this way? This part of the Trump plan I actually do think is completely bonkers so I assume that it won't get anywhere.

dragonwriter 9y ago

> If I organize as a C-corp, I pay the corporate rate which is also roughly 40%, and I also get double-taxed on salary and any dividends paid to owners. Salaries for C-corp employees, including top officers that happen to be major shareholders, are a deductible business expense (well, there may be some issues if they are over $1 million annually, but...), so you only get double taxed on dividends.