3 ms·

Sorry, it does not work like that (through 2017 anyway). If you own a pass through (s-Corp/LLC etc) distributions are untaxed, however all earnings of the firm

Sorry, it does not work like that (through 2017 anyway). If you own a pass through (s-Corp/LLC etc) distributions are untaxed, however all earnings of the firm are taxed at your personal tax rate. It’s not to say that wage and firm earnings are exactly the same, but pretty close.

GFischer 9y ago
There are a LOT of ways to game taxes if you're either an S-Corp or a C-Corp (without going into stuff like overseas, disguising personal expenses as business expenses, and other classics), and the original papeer has a very telling graph showing it (ok, so it's less than a 5% reduction, but it's still a tax break). See the original PDF, page 72 "The marginal tax rate falls at the top because active S-corporation income is a larger share of total labor income at the top but is not subject to the 2.9% Medicare tax and 0.9% ACA Additional Medicare Tax. See Section 7 for additional details." http://faculty.chicagobooth.edu/owen.zidar/research/papers/capitalists.pdf http://faculty.chicagobooth.edu/owen.zidar/research/papers/c... Not to mention they're going to get WAY bigger under Trump: http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-through-trump-tax-20171004-story.html http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-t... Edit: as meritt posted, it's going to be like 20% (!!!), not taking into account the other tricks.
- rbcgerard 9y ago
  Yup - I was merely pointing out that there is not some massive tax arbitrage (pre-2017 and in the context of the data). For example: Let's say a firm has $5m in net income before paying CEO salary, and let's say that the market rate for such a position is $1m/year, and the firm is 100% owned by the CEO. Let's say the company is in a high tax state (NYC? SF?). Now let's take two scenarios, one where the owner operator pays herself $150k in salary and the other where she pays herself $1m in salary. If the non salary income is taxed at ~45% and the salary income ~50% then her effective tax rate is 45.2% vs 46.0% for a ~$43k tax savings ($2.257m vs $2.300m in tax liability). This tax benefit is definitely going to lead people to want to characterize less income as salary, but in the grand scheme of things is not some wholesale tax doge as was previously implied...

GFischer 9y ago

There are a LOT of ways to game taxes if you're either an S-Corp or a C-Corp (without going into stuff like overseas, disguising personal expenses as business expenses, and other classics), and the original papeer has a very telling graph showing it (ok, so it's less than a 5% reduction, but it's still a tax break). See the original PDF, page 72 "The marginal tax rate falls at the top because active S-corporation income is a larger share of total labor income at the top but is not subject to the 2.9% Medicare tax and 0.9% ACA Additional Medicare Tax. See Section 7 for additional details." http://faculty.chicagobooth.edu/owen.zidar/research/papers/capitalists.pdf http://faculty.chicagobooth.edu/owen.zidar/research/papers/c... Not to mention they're going to get WAY bigger under Trump: http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-through-trump-tax-20171004-story.html http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-t... Edit: as meritt posted, it's going to be like 20% (!!!), not taking into account the other tricks.

rbcgerard 9y ago
Yup - I was merely pointing out that there is not some massive tax arbitrage (pre-2017 and in the context of the data). For example: Let's say a firm has $5m in net income before paying CEO salary, and let's say that the market rate for such a position is $1m/year, and the firm is 100% owned by the CEO. Let's say the company is in a high tax state (NYC? SF?). Now let's take two scenarios, one where the owner operator pays herself $150k in salary and the other where she pays herself $1m in salary. If the non salary income is taxed at ~45% and the salary income ~50% then her effective tax rate is 45.2% vs 46.0% for a ~$43k tax savings ($2.257m vs $2.300m in tax liability). This tax benefit is definitely going to lead people to want to characterize less income as salary, but in the grand scheme of things is not some wholesale tax doge as was previously implied...