How Will You Get Money Out of Your C Corporation?

A C corporation offers many financial benefits-it’s just a question of using the right strategies to take advantage of them! You also need to be aware of potential tax traps. The following excerpt from “Loopholes of the Rich” by Diane Kennedy, CPA, discusses both scenarios.

There are two kinds of money problems—not enough money and too much money! In the case of your C corporation, you can have too much money. One of the strategies to use with a C corporation is to take advantage of the separate taxing structure and leave income within the corporation. Now, how do you access it? My favorite ways to access the money are:

  • Tax-free benefits.
  • Salaries.
  • Loans.
  • Money partner.

Tax-Free Benefits
First, look for tax-free benefits available from the corporation. These are the benefits that the corporation can pay for you for which it takes a deduction and you don’t pay tax. This is the best of all worlds!

A salary paid to you is a deduction for the corporation and income for you. It’s generally income tax neutral because of the offsetting deduction for the corporation. Use this way to balance out the income tax brackets so that you are paying the lowest tax rates both for yourself and for the company.

Your company can lend money to you. Be careful with this, though. If you are taking out your cash in the form of loans and not sufficient salary, the IRS can come back in and recategorize the payments as dividends.

Even better, have your company lend money to your investment LLC or LP. This way the company is just making an investment like any other form of investment, and it provides the cash for the investment.

Money Partner
Your C corporation can become a money partner by providing the cash for an investment. Form an LLC in which both you and your company are members. The corporation provides the money and you provide the management.

There are potential tax traps for your C corporation. Make sure you review the following carefully or you might just get caught in a trap that costs you more tax.

Double Taxation
Double taxation occurs when income is first taxed at the corporate level and then at the personal level, with no offsetting deduction for the corporation. In other words, the income is taxed twice.

Double taxation occurs only when dividends are paid. Most expenses that a corporation pays are deducted against the income of the corporation, so there is no double taxation. It is also possible to have liquidating dividends when a corporation is liquidated. For example, if your corporation sells off all of its assets and then you immediately dissolve the corporation, you will receive something that the IRS calls a “liquidating dividend.” There is no deduction for the corporation because it doesn’t exist anymore; you have to pay tax on the gain from the sale of assets, and then you have to pay tax personally for the dividend income received.

Double taxation through dividends can also occur when a corporation doesn’t have proper documentation.

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