This issue is complex enough to warrant a proactive consult with your Wilmington NC CPA
Will expected changes in the tax rates change C Corporation tax strategy? While the planning components remain the same, I feel emphasis will shift back to greater emphasis on shareholder-employee salaries, to reduce corporate income and avoid double taxation after 2010. In the mean time . . .
2010 Opportunity
This is a complex enough issue to proactively consult with your Wilmington NC CPA first. Tax rate changes are likely to reverse the 15% corporate dividend tax rate of the Bush era tax cuts. Instead dividends will probably be taxed as ordinary income. And individual marginal tax rates are expected to increase. This could mean 39.6%, a 24.6% increase!
Just as an example, assume overall tax positioning and corporate financing allows the C Corporation to distribute $10,000 to a shareholder. The shareholder takes a $1500 tax hit in 2010. Left in E&P, that same $10,000 could incur $3960 in 2011, depending on the exact tax schedule passed and the marginal tax rate of the shareholder. Even at a modest 28%, the additional tax in 2011, on the same $10,000 of dividends, would be $1300! So, to the extent of you C Corporation’s E&P and prudence, consider taking dividends in 2010 at a 15% federal tax rate to hedge bets that higher rates will apply in tax year 2011.
“Tax preparation for Form 1120 should start long before tax season. Potential double taxation means balancing the AET, shareholder-employer compensation and dividends.”
Gary Bode CPA
Wilmington NC Accountant and Tax Preparer
If you need a free consult with a Wilmington NC CPA who performs C Corporation, Form 1120, tax preparation, call us at (910) 399-2705.
