How C Corporations Can Save You Taxes

One of the most misunderstood loopholes for income splitting is by the use of a C corporation.

C corporations are completely different from LLCs, S Corporations, Sole Proprietorships and Limited Partnerships. The biggest difference is in how they’re taxed. C Corporations file their own taxes. As an owner, you don’t get a K-1 that flows income through to your personal return. The corporation pays taxes at its own level.

Now one of the benefits of a standard C corporation is that the first $50,000 of income in this structure is taxed at 15 percent. If you can set up your business income to go through a C corporation, or divert one of the moving parts of your business into a separate C corporation, you can then take advantage of the rate difference between your personal tax bucket and your corporation’s. That loophole alone can save you $10,000 or more annually!

A couple of things to remember. First, the C corporation has a graduated system, so you want to careful not to leave too much income in the C corporation. Otherwise, the higher rate of the corporation will negate any advantage of moving the money from your personal tax rate.

Second, one C Corporation is great - but two or more is a problem, especially if you own 50% or more of each corporation. That’s where something called a controlled group comes up. If you are part of a controlled group, your C Corporations actually begin losing tax breaks! The Section 179 deduction is a great example of this. This year, thanks to the Economic Stimulus Act, businesses can write off up to $250,000 for purchases of property and equipment bought and put into service during 2008. But in a multiple C Corporation situation you don’t get multiple Section 179 deductions. You get one deduction spread across all your C Corporations. In this case, each additional C Corporation you own could wind up costing you $250,000 in potential deductions!