You are about to start ABC corp. You intend to finance the corp with personal assets of 50k. This equity will eventually be matched by external funding, ie bank notes or SBC financing, but that is moot.
You have two choices. You can invest 50k in your business, and take out shares representing contributed capital. Or you can loan the business 50k with a note payable issued to you.
Now, 4 years later, your business is throwing off 15k/year income. You can extract that flow by repaying the note, with no dual taxation, as the flow of funds is not dividend, but repayment of the note. Further, the interest income is not subject to FICA. So the characterization of the income is alterated from ordinary income taxed at the highest possible rate in our present system to passive income taxed at a lower rate.
Only by carefully considering how you are going to extract the capital (exit strategy) can you prevent simple mistakes that cost you later in higher taxes.
Extraction of capital was the intent of all the above obfuscation? Are you in the phony corporation set-up business? You don't structure a company to fail. The above example demonstrates nothing. It sounds like the horrible tax laws have filled you with hate. Those laws have you and everyone else living in hell, so why defend them? No other conclusion can be reached from examining closely your example.
Another example- Oregon has a personal property tax for business equipment. Jane Doe wants to set up a corporate structure. She contributes her office equipment (computer, postage meter etc) valued at 10k. The following year, she has an ugly form to fill out to compute the personal property tax due. If she had only leased the equipment at fair market value to her business, she could have deducted the business loss against her ordinary income (though technically should have include the rental income elsewhere). The important aspects of this transaction is the avoidance of an additional personal property tax and the recharecterization of ordinary income her business owning the equipment would have thrown off into rental income.
What does this prove? It proves all my points in spades. The tax laws are causing people to go crazy and do absurd things. How is it that you are defending them?
I'm not an attorney nor a cpa, so don't try this at home without the appropriate advice.
My CPA thinks I'm the sharpest CPA he's ever seen. He used to argue against my claims about how shelters and other gimmicks like your hotel owner scam was directly destructive. It took him 10 years to come to my view. He was motivated to disagree because he thought it was in his financial interest to cook up these legal devices for the "big bucks". They ended up causing him and his clients chronic suffering. I asked him if it was worth it. He said, if gaining $1 to lose a $100 is worth it, I guess so, otherwise it's a bust unless you can con others to do the work for you.
And it is legal to work within the proscribed rules to avoid, not evade taxes.
But under audit the onus is on you to show that it is only avoidance. They always find a way to increase your assessment while you spin with the tax law tome in hand.
You still haven't addressed a basic issue. If your clients are so wounded by corporate taxes, then why the heck do they choose that structure?
They aren't. You aren't paying attention. I said that they use the real estate gimmicks and never would invoke corporation. Maybe you don't know about the higher than ordinary rate on the first chunk of income under the corporate form. What if that's all you make in a given year? Because of those little items and many more under the corporate form, it is rare to find anyone going that way.
This is free market at it's finest. If corporate taxes were destructive, then why are there so many corporations
I didn't say that corporate taxes destroy corporations. Ipso facto they haven't. Sometimes they do, but mostly not. Corporate taxes increase the cost we all must pay and make corporations less efficient in the quality and quantity of their output by reducing their power to improve what they do. But the true killer is why corporate taxes exist at all. There is no reason except for one: the historical precedent of class warfare which enables a secret excise tax to be levied which has no economic justification but its moral Calvanism. |
