Business Management, Taxes

Tax Rates- Pass Throughs and C’s

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Soooo.   You’ve heard it.  You know it.  Corporations all complain about that 35% tax rate- but few, if any, are paying taxes at that rate.  Big companies pay virtually ZERO % and middle-market companies pay 15 to 18%.  (By the way, a whole slew of single-owner corporations pay a mandated 35% tax rate!) And, our clients- the ones we convinced to form LLC’s and S entities to save on taxes want us to explain how come they are not paying taxes at the 15% to 18% rates.

Dirty 30- Citizens for Tax Justice- 2012

Soooo.  Here goes. You probably came to us when you started your business- or after a year or two.  And, you were grossing $ 100 K, with about $ 30 K expenses.  And, you then had to pay $ 11 K in social security/Medicare taxes, $ 15 K in mortgage interest, and $ 5 K in health care insurance.  Leaving you with $ 24 K of taxable income, after deductions and exemptions.  Which meant you owed $ 3000 more in tax.  And, you still wondered why you had to shell out about $ 14 K in taxes- for a tax rate of about 20%.  Oh, wait- that’ was about the same tax rate the middle-market companies are paying.  (Of course, the bulk of your taxes were employment taxes, not income taxes.)

But, we did our best for you.  We reconstituted your business as a pass-through entity.  To make a long story short, the amount you paid in taxes was cut in half- or more! So, what’s your problem?

Many of you have read the articles that you should now be a C corporation, because these “pundits” say that a is better tax situation.  And, then you come to us, because you believe you could get your tax rate no more than 15% or even 18% (which, by the way, is more than you are currently paying with our changes to your corporate structure).

More importantly, you need to remember that forming a C corporation means that business profits stay in the corporation.  If you transfer any money from that corporation to you- then it’s a taxable dividend!  (Corporate profits can only be transferred to stockholders after taxes are paid on that profit.)

If you transfer that money in the current year, you will be taxed on that money on your individual tax rate- somewhere between 10 and 39.5%.  If you could survive without transferring that money to your personal account for another year- assuming this tax break stays (it’s not clear that qualified dividends will still be “qualified” soon enough), then it will only cost you another 5% in taxes.  Which still is more than you are paying now.

So, the fact that you hired our firm to help you manage your company and your finances has dramatically cut your tax rates…Because you, too, are not at that 35% rate- and probably at a rate akin to many of those larger corporations in the table above.

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9 thoughts on “Tax Rates- Pass Throughs and C’s”

  1. Roy, I know how frustrating it must be for you to have to explain over and over how you are saving these people from the tax man. I am sure I might be confused if I were a new client because it seems that you aren’t doing anything. Meanwhile since I know you very well, I would trust you. And when people talk about taxes, they talk about abstracts until you get to the individual set. I am sure you would not have the time or the patience to take them through all the different ways they can wind up owing more unless you charge them up to that amount to have done the extra work..
    Ann Mullen recently posted..An Aesop-type Fable About Diana and Caregiver Burnout

    1. Ann…
      I think you let me know that I failed to communicate. Too many folks have no clue what their actual tax rate it- that was one of the primary points I thought I communicated. And, that’s why they always think they are paying more- or less- than they really are. Some folks think they pay less, because they assume that the tax rate is on their gross income- and not their net. Some folks- the self-employed- do not understand that $30,000 of self-employment income (a family of four) means you are at the poverty level- and yet you still owe at least $4500 in taxes (called payroll taxes).
      Those are the kind of issues that we want our clients to bring to us- so we can help them pay the lowest taxes allowed by law- and grow their businesses to owe more taxes (with more for themselves!)

      Thanks for giving me the chance to explain it further!

    1. I have always had the desire to be an expert in everything, Muriel…
      But, alas, and alack, I’ve found that theoretical physics, playing the violin, and jumping out of airplanes are not going to be among my fortes…
      Seriously, though, we all need to know what we do well- and get the best benefit from those things…Let’s leave the rest to others who do them well- for us…

      Thanks for the visit and comment.

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