How to Save Thousands with an S Corporation
S Corporation owners earn limited tax deductions on the profits of their company, which can limit their overall income. With an S Corp, however, there is a way to "unlock" the company’s potential to generate significant benefits for your personal finances in addition to continued growth. Here are six reasons why you need an S Corporation!
1) Limited Tax Deduction: Owners of an S Corporation will usually see minimal or no tax deduction on the profits earned by the corporation. When you add up all future costs and expenses (W2-wise), including capital investments in equipment and property, operating costs with accrued debt... you’re left with very little, if anything. The profit on your own personal income tax return is limited to only $500, which means that you’re losing out on potential deductions you could be taking under a different form of business.
2) Tax-Free Cash Flow: As an S Corp owner, you are able to receive and distribute corporation profits without paying any taxes on them. The best thing about this is that the profits flow through to your personal income tax return as taxable income (you’ll receive a W2) but with no tax liability. So in essence, you are earning money without having to pay taxes on it! This can provide cash-flow for your business operations and personal expenses alike.
3) Tax-Free Dividends: Dividends received from the S Corp are received tax-free. This can be a great benefit for S Corp owners who are shareholders. If you use cash to pay yourself these dividends, there will be no tax liability as well. This means that your business has a way to put money back into your pocket without any taxes being paid!
4)Unlock Capital Gains: In most cases, an S Corporation shareholder pays lower taxes on capital gains but this may not always be the case if the S Corp is structured incorrectly or if the shareholder has other passive investments that work against them. So if you are an S Corp owner and are holding on to the stock (inherited or purchased), it is often a good idea to sell your shares so that you can "unlock" all of the capital gains and potential tax reduction. If the stock is held for at least two years, any income earned on it will be taxed as long-term capital gains tax rate of 15% (which is lower than normal income tax rate of 35%).
5) Tax Benefits: If your business has a good track record and is worth more than $50,000, then you may be able to receive an S Corp designation with a larger exemption from small-business taxes. In fact, many small businesses are eligible for several tax breaks that can help offset any future income or gains made by the S Corp. Additionally, as an S Corp owner, you may be eligible to contribute to a variety of retirement plans (like an IRA or Solo 401K) that allow your first $120,000 in earnings to grow tax-deferred. It’s very important to consult with a financial professional who can help maximize this potential benefit.
6) Avoid Estate Taxes: If your business is set up as an S Corporation and passes on to your heirs following your death, it may avoid estate taxes if it stays within the family and doesn’t exceed $10 million dollars. This can be a great way to pass on your business and avoid costly estate taxes.
So What’s the Bottom Line?
An S Corporation offers tremendous tax savings and benefits for business owners who want to unlock their company’s potential. With an S Corp, you can take advantage of unlimited cash-flow, tax-free dividends and even tax breaks for retirement savings or estate planning. In many cases, an S Corp will make financial sense for you! [END ARTICLE]
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How to Save Thousands with an S Corporation
It's been a while since I've written a blog post. I'm actually thinking of starting a blog in the next week to catch everyone up on new developments and stuff like that. I decided it would be OK to write this one as people are always looking for information on how to save with an s corp.....and based on the demand I wanted to just put this out there and got writing, hopefully it makes sense...
I own two companies: The Real Estate Business and The Wealth Building Company. Both companies have tax advantages (both federal and state).
The Real Estate Business is really the engine for my wealth building. I have about a dozen houses and have been buying and selling them for over 10 years. I have all the paperwork to show my tax deductions from all of this, which in turn makes me "wealthy".
The Wealth Building Company is a specialty marketing company that helps companies get more clients as well as fill in their name brand/awareness. This company is also very profitable. I will also use this company to help other people build wealth with us (like you).
There is a benefit for owning businesses like this. My goal is to have cash flow that pays my bills and then build wealth with the excess.
S CORP:
An s corp allows me to pay myself more tax free. In my case I will make an additional $50,000 on top of what I already make personally in taxable income. That works out to be about $10,500 after taxes (at 35% fed), which would give me $60,500 total income ($50k - $10,500). And this can continue every year….forever.
I currently don't have any employees for either company, so I won't have to pay them $40,000 each or something. However, if I had employees I could pay myself a reasonable wage and then the excess would be distributed as dividends. This is good too because of a tax advantage. The income that is paid to me as an employee (wage) is at the 35% bracket on my personal income tax return…which means it’s not all taxed like normal income to me. Therefore, it's not that big of a deal because my salary expenses are also tax deductible. The IRS will still get $30,500 ($3500 x 12). But because of the S Corp designation, I can have $50,000 in salary expenses and pay myself tax free.
How is that same money distributed again? Well I can't hire someone to work for me without paying them taxes (at 25.00% federal). I currently employ my mother and she does a great job for me. The reality is that if my mother didn't do such a good job for me, I would have to fire her. So by hiring my mother, again you get a tax benefit.
Conclusion:
S CORP: Income - $50,000 - Taxable (top rate is 35%) - $30,500* - Tax Free.
What about estate taxes? In the case of my mom this would probably be a wash…because she would have to pay federal estate tax on the substantial portion which is more likely than not. But, if I don't have an estate and my mother does I'll get some money from her, which will be taxed at 35% as well. This is achievable because I am already an S corp and can pay myself $50,000 additional income tax free (therefore creating a taxable company).