Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Is double taxation good?

Posted by taxguru on April 23, 2008

Q:

Subject:  Double taxation?

Kerry,

Thanks very much for your informative and enjoyable blog.

I often hear the line that C corporations are a bad choice because of the double taxation issue. I know you have explained before that there are many ways to avoid double taxation.  But I have tried to figure out why “double taxation” is really worse than the alternative.

Let me explain my thinking. As I understand it, the first $50,000 in income for a C corporation is taxed at 15%, and any dividend that would be paid to shareholders is also taxed at 15% (maximum). Combined, that is a 30% tax rate.  This seems like a bargain compared to the corporation paying a salary:  The individual would likely pay a 28% tax rate on the salary (assuming the individual has already reached the 28% bracket from other income), and then would pay an additional 15.3% FICA tax (half paid by the corporation), for a total federal tax rate of 43.3%.  Since 43.3% is more than 30%, isn’t “double taxation” actually the preferred outcome here, at least for $50,000 worth of corporate income?

Thanks,

A:

I’m too busy right now to go into too much detail.

However, you may have missed the point that I am not a fan of using payroll as a means of shifting income from the corp to the 1040 because of the payroll taxes.  We use unearned income, such as interest, rents and royalties, which have no payroll taxes associated with them; just normal income tax.

By properly shifting income back and forth, we have been able to very easily achieve a maximum Federal income tax of just 15% overall; not the 30% under your double taxed scenario.

A good tax advisor, along with accurate up to date QuickBooks data, should be able to help you achieve this.

Good luck.

Kerry Kerstetter

 

 

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