Owners of closely held C corporations are often interested in withdrawing profits from their companies in ways that minimize taxes. What are the options?
Pay Salary/Bonus.
If the owner is a company employee, taking more salary or a yearend bonus is an option, as long as the total amount of compensation the owner receives is reasonable. The company deducts the payments as a business expense; the owner is taxed on the money. The “cost” of this option depends on the corporation’s and the owner’s tax rates. Payroll taxes are an added expense.
Pay Family Members.
Reasonable amounts paid to an owner’s family members for services actually rendered to the company are deductible by the corporation and are taxable at the family members’ own tax rates. Often, these rates are much lower than theowner’s. Pay a Dividend. Dividends the company pays out will, in effect, be taxed twice — once at the corporate level (dividends are nondeductible) and once to the owner personally. No payroll taxes will be due. With the individual tax rate on qualifying dividends currently capped at 20% for taxpayers in the 39.6% regular bracket (and 15% for most other taxpayers), this option may have more appeal.
Utilize Fringe Benefits.
Certain fringe benefits are deductible by the corporation but not includible in the owner’s gross income. Examples include qualifying group life insurance, health care benefits, and disability insurance. (Most fringes must be provided on a nondiscriminatory basis to other company employees.) To the extent an owner is paying for these items individually, having the company pay for them increases the cash available to the owner.
Take a Loan.
If an owner borrows money from the corporation, the owner is not taxed on the loan amount. The loan must be a legitimate debt, with proper documentation and timely interest and principal payments.
Lease Assets to the Company.
An owner might consider leasing property to the corporation. The company deducts the lease payments; the owner includes the amounts received in income and deducts expenses associated with the rental activity.