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C Corporation CPA discusses 2012 Dividend Strategy | Form 1120

I’m a C Corporation CPA with a virtual office to accommodate long distance clients. This 2012 C Corporation dividend strategy is complex and deserves consultation with your CPA.

No one really knows what C Corporation tax changes will take place for 2013. At the moment, it looks like C Corporation dividends will get taxed as ordinary income to the Shareholder. So, instead of the current 15%, it could be 39.6%. Let’s further assume you’re lucky enough to pay the additional new 3.8% Medicare tax on investment income. This brings the potential federal tax rate up to 43.4%.

“Tax preparation for Form 1120 should start long before tax season. Potential double taxation means balancing the AET, shareholder-employee compensation and dividends.”
– Gary Bode, C Corporation CPA and Form 1120 tax accountant

Just as an example, let’s assume overall tax positioning and corporate cash flow allow the C Corporation to distribute $10,000 to a shareholder. The shareholder takes a $1500 tax hit in 2012. Left in E&P, that same $10,000 could incur $3,960 in 2013, depending on the marginal tax rate of the shareholder. Let’s add the potential Medicare additional tax of $380. That’s potentially $4,340 of federal tax on a $10,000 dividend! $2,840 over 2012 (as it stands at the time of this post).

So, to the extent of C Corporation E&P, and financial prudence, consider being ready to pay dividends in 2012, at a 15% federal tax rate, in case higher rates apply in 2013.

If you don’t have a C Corporation CPA, or just like what you read here, consider calling (910) 399-2705 for a free phone consult. Our virtual office means distance is not a factor for providing services.

 

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