"Karl Irvin" <88karl3200[at]comcast.net> wrote:

- quote -

Are you saying that the owner's reduced tax on C-Corp
dividends more than offsets the fact that the company will
have to pay income tax on $600,000 of earnings?

I don't know if that is true or not, but just want to
understand the issue.

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Karl Irvin wrote...

- quote -

I'm sure some of the MTM regulars can provide a more
thorough analysis than mine (and perhaps point out any
oversights on my comments), but my initial thought is that
there are issues with both scenarios:

(1) If a reasonable level of compensation of $200K can be
established for the shareholder/owner, then why is an $800K
salary being used with a pass-through entity (S-corp)?
Taking a $200K salary and $600K pass-through income would
save $17,400 Medicare portion of taxes (2.9%) paid by the
corporation and the shareholder/owner. Shareholder is
already above the thresholds at $200K and won't save
anything on the FICA and FUTA taxes, but the pass-through
$600K would be taxed at shareholder's income tax rate rather
than double taxed with corporate rates (see next).

(2) The downside to revoking the S-corp election and
converting to C-corp is that dividends are not deductible by
the corporation, so the corp would pay about $204,000 in
taxes on the $600K profit/dividends, and shareholder/owner
would pay probably 15% on the dividend distribution
($90,000).

--
Bill Bourbonnais

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"Karl Irvin" <88karl3200[at]comcast.net> wrote:

- quote -

Dividends are not tax deductible by the corporation, but are
taxable to the recipients.

Wayne Brasch, CPA, M. S. Taxation

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Corp is is currently an S corp. Accounting method is accrual
S corp return shows no profit after 800k salary to owner
Owner wants to take out all profits each year

Corp has about 20 employees but no equipment to speak of. It
provides services but contracts out all work except job
supervision.

What are the pros and cons of revoking the S election and
paying 200 k in salary and 600k in dividends?

Tax saving appear to be 100k plus.

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