4 ms·

Under the Trump Tax Plan, We Might All Want to Become Corporations

19 points by tommoor 10y ago

tinus_hn 10y ago
So the sovereign citizens had a point after all!
valuearb 10y ago
So I incorporate a C corp to provide my services with, so I only pay 15% taxes on what my employer pays me. But in order to spend the other 85% I have to dividend it to myself. There I owe 15-20% more in taxes (Edit: unless I'm in the very lowest bracket) for a total of 28-32% (edit: recalculated realizing dividend rates are 20% at high brackets). The author should double check that he's deep in the 35%/39% brackets or this makes no sense. The 15% corporate rate would be on every dollar of profit, just as the 15% dividend rate would be on every dollar of distribution, so effectively he's be paying 30% on nearly 100% of his income instead of 10% on first $9k, 15% on next $20K, 25% on next $50k, 28% on the next $100k, etc. If you make $191k, you owe $46,500k in taxes (obviously ignoring deductions). That's total of 24%. If you make $416k, you owe $121k in taxes, or 29%. And this ignores the fact that the IRS doesn't let you run a profitable corporation without paying a reasonable salary. Even if I can only pay myself half what my employer pays the corp, all of that paycheck is at normal income tax rates plus payroll taxes. Lastly, note that this "scam" exists today. The federal C corp tax rate on first $50k in income is 15%. But obviously it's not worth it.
- maxerickson 10y ago
  They are talking about applying the rate to pass through entities. The assumption people are making is that after the change only the corporate rate would apply to that income, it wouldn't be taxed again as personal income. It doesn't matter, the bullet list they put out is a press release to start the policy conversation, not anything that is going to get through Congress intact.
  - valuearb 10y ago
    Pass through entities means the entity doesn't pay taxes, it's owners do. And they always pay at personal income tax rates, so 39% for the high earners. This "loophole" exists today, again you have to pay yourself a reasonable salary but most sole proprietorships and tightly held (like family owned) businesses are structured this way. Either the author is confused about pass through entities, or I am confused about Trump's proposal, because I'm thought it only affects C corps, not pass through entities. Edit: OK, I've re-read it and it was my confusion. The author is claiming that S corp owners want lower taxes if C corp owners get them, and the author is entirely correct that would be a huge loophole. What he doesn't say clearly enough is it's ridiculous on it's face, pass through entities don't get double taxed already, and because C corps are double taxed they and their shareholders will still pay as much if not more taxes than the shareholders of passthrough entities with similar levels of income. C corps will still pay on average 20% given state taxes, combined with state and federal taxes on dividends their high income shareholders will certainly pay over 40% combined. In CA a highest bracket taxpayer receiving dividends from a C corp would pay 10% State Corporate, 15% Federal, 13% State income, 20% federal dividend, or 47% total taxes on every dollar of profit. If their business is an S corp, they'd pay 13% state taxes, and 39% federal, which works out to a nearly identical 47% rate. But for the S Corp, no one pays 39% on all their income, as I wrote above they only pay around 28% on their first $400k, so again the pass through entity is going to be lower tax than a C corp even with Trumps proposed tax cut. For example, if you made $1M after deductions, you would pay $350k in federal income tax, or 35% even though you were deep in the 39% bracket, even at the top CA tax rate your total income taxes would be around 44% with a pass-through. Significantly less than a C corp with Trump's 15% rate.
    - maxerickson 10y ago
      There have definitely been remarks about applying the proposal to pass throughs. I don't think it is really all that interesting of a discussion because the plan isn't fleshed out enough. In any case, they do have the goal of substantially altering the tax system, I guess what we have now isn't necessarily instructive about the shape it will take.
- valuearb 10y ago
  BTW: Where Trump went wrong is that he should have proposed a 0% corporate rate, combine with treating dividend/capital gains as ordinary income and subjected to payroll taxes. Then there is no gaming of the rates, and a far simpler, progressive, and lower cost system. You want to reinvest profits back into the business? Great, no taxes. You want to dividend out to have spending money? Great, you pay taxes. Lets not forget that because of double (quadruple?) taxation the average tax rate on distributed C corp profits is in excess of 50%. 35% federal corporate rate, + 5-10% state corporate rate, + 15-20% federal dividend rate, + 0-13% state dividend rates. For a wealthy person in California who is an investor in a C corp, they'll pay about 60% in taxes on every dollar of profit dividended to them. Worse is that a poor retiree receiving dividends from her stocks in CA will still pay at least 40%, even if the company pays no state income tax on it's profits.
andriesm 10y ago
In my country they solve this, by requiring your sub-contracting meets certain criteria before it will be taxed as a corporation, rather than as an individual simply using this as a way to disguise salaried income. Did you receive income from more than 1 client, was more than 80 percent of the income from 1 customer. Do you employ less than 3 people? Does thr nature of the work require fixed hours or do you set your own. I'm simplifying because I am not a tax accountant, but it is basically a combination od these criteria that determine whether your one person service "business" is taxed like a business.

19 points by tommoor 10y ago

So the sovereign citizens had a point after all!

So I incorporate a C corp to provide my services with, so I only pay 15% taxes on what my employer pays me. But in order to spend the other 85% I have to dividend it to myself. There I owe 15-20% more in taxes (Edit: unless I'm in the very lowest bracket) for a total of 28-32% (edit: recalculated realizing dividend rates are 20% at high brackets). The author should double check that he's deep in the 35%/39% brackets or this makes no sense. The 15% corporate rate would be on every dollar of profit, just as the 15% dividend rate would be on every dollar of distribution, so effectively he's be paying 30% on nearly 100% of his income instead of 10% on first $9k, 15% on next $20K, 25% on next $50k, 28% on the next $100k, etc. If you make $191k, you owe $46,500k in taxes (obviously ignoring deductions). That's total of 24%. If you make $416k, you owe $121k in taxes, or 29%. And this ignores the fact that the IRS doesn't let you run a profitable corporation without paying a reasonable salary. Even if I can only pay myself half what my employer pays the corp, all of that paycheck is at normal income tax rates plus payroll taxes. Lastly, note that this "scam" exists today. The federal C corp tax rate on first $50k in income is 15%. But obviously it's not worth it.

maxerickson 10y ago
They are talking about applying the rate to pass through entities. The assumption people are making is that after the change only the corporate rate would apply to that income, it wouldn't be taxed again as personal income. It doesn't matter, the bullet list they put out is a press release to start the policy conversation, not anything that is going to get through Congress intact.
- valuearb 10y ago
  Pass through entities means the entity doesn't pay taxes, it's owners do. And they always pay at personal income tax rates, so 39% for the high earners. This "loophole" exists today, again you have to pay yourself a reasonable salary but most sole proprietorships and tightly held (like family owned) businesses are structured this way. Either the author is confused about pass through entities, or I am confused about Trump's proposal, because I'm thought it only affects C corps, not pass through entities. Edit: OK, I've re-read it and it was my confusion. The author is claiming that S corp owners want lower taxes if C corp owners get them, and the author is entirely correct that would be a huge loophole. What he doesn't say clearly enough is it's ridiculous on it's face, pass through entities don't get double taxed already, and because C corps are double taxed they and their shareholders will still pay as much if not more taxes than the shareholders of passthrough entities with similar levels of income. C corps will still pay on average 20% given state taxes, combined with state and federal taxes on dividends their high income shareholders will certainly pay over 40% combined. In CA a highest bracket taxpayer receiving dividends from a C corp would pay 10% State Corporate, 15% Federal, 13% State income, 20% federal dividend, or 47% total taxes on every dollar of profit. If their business is an S corp, they'd pay 13% state taxes, and 39% federal, which works out to a nearly identical 47% rate. But for the S Corp, no one pays 39% on all their income, as I wrote above they only pay around 28% on their first $400k, so again the pass through entity is going to be lower tax than a C corp even with Trumps proposed tax cut. For example, if you made $1M after deductions, you would pay $350k in federal income tax, or 35% even though you were deep in the 39% bracket, even at the top CA tax rate your total income taxes would be around 44% with a pass-through. Significantly less than a C corp with Trump's 15% rate.
  - maxerickson 10y ago
    There have definitely been remarks about applying the proposal to pass throughs. I don't think it is really all that interesting of a discussion because the plan isn't fleshed out enough. In any case, they do have the goal of substantially altering the tax system, I guess what we have now isn't necessarily instructive about the shape it will take.
valuearb 10y ago
BTW: Where Trump went wrong is that he should have proposed a 0% corporate rate, combine with treating dividend/capital gains as ordinary income and subjected to payroll taxes. Then there is no gaming of the rates, and a far simpler, progressive, and lower cost system. You want to reinvest profits back into the business? Great, no taxes. You want to dividend out to have spending money? Great, you pay taxes. Lets not forget that because of double (quadruple?) taxation the average tax rate on distributed C corp profits is in excess of 50%. 35% federal corporate rate, + 5-10% state corporate rate, + 15-20% federal dividend rate, + 0-13% state dividend rates. For a wealthy person in California who is an investor in a C corp, they'll pay about 60% in taxes on every dollar of profit dividended to them. Worse is that a poor retiree receiving dividends from her stocks in CA will still pay at least 40%, even if the company pays no state income tax on it's profits.

andriesm 10y ago

In my country they solve this, by requiring your sub-contracting meets certain criteria before it will be taxed as a corporation, rather than as an individual simply using this as a way to disguise salaried income. Did you receive income from more than 1 client, was more than 80 percent of the income from 1 customer. Do you employ less than 3 people? Does thr nature of the work require fixed hours or do you set your own. I'm simplifying because I am not a tax accountant, but it is basically a combination od these criteria that determine whether your one person service "business" is taxed like a business.