Hello

I had one of my students (you guys) call me this week and ask questions about taxes. He is a consultant and makes pretty good money. Decades ago, his accountants looked at him and said, “Ok you’re in business, you need a C Corporation.”

I can save you from reading the rest of this article by giving you the punch line now. If you have a C Corporation or an LLC taxed under Chapter C, get rid of it yesterday. NOW! You can’t even imagine what this guy’s accountants have cost him.

You can change your Chapter C entity to a Subchapter S tax entity by just filing a 2553 with the IRS. You don’t have to change anything at the state related to your “legal structure.”

In his C Corporation, this guy has had to take 100% of the money he has generated as a W2 wage. That means he has paid employment tax on every dime of income he has generated. I’m sure he never paid anything out as a dividend, because the C Corporation pays tax at its rate (21% today, but before Trump it was a lot more than that). Then when he gets the dividend, it counts as his income, and he pays personal income taxes on it – double taxation!

If you are making money through the sale of goods or services (services like a consultant, doctor, dentist, etc.), then you need to be taxed under Subchapter S. NO QUESTIONS ASKED!

The Subchapter S tax structure (for either a corporation or an LLC) is advisable because you can take a “reasonable salary” and then pay out the rest of your earnings as a distribution to yourself. A distribution from a Subchapter S is nothing like a dividend from a Chapter C entity (corporation or LLC).

You want to have a distribution, because the distribution is not subject to employment tax. That means on a distribution you save 15.3% by not paying employment taxes on the distribution amount. Note that if you are using a partnership or a Schedule C, then all your “profit” has to be paid out to you and it is all subject to employment taxes.

Let’s say the consultant that called me up for a consultation earned $150,000 last year. In his C Corporation, he paid employment taxes on the full $150,000. Let’s say he has an entity taxed under Subchapter S instead of Chapter C.

The law says he has to pay himself a “reasonable salary” from his Subchapter S entity. There is a whole bunch of court cases where the IRS challenges what someone says is a reasonable salary, but in this case in all probability there won’t be any trouble if he pays himself a salary of $50,000.

He can take the remaining $100,000 as a distribution from his Subchapter S entity. The distribution comes to him without any employment tax being charged against it. That just gave him an extra $15,300 to spend. He saved the employment tax on the distribution, which is a 15.3% savings.

But Wait, There’s MORE!

The distribution is counted as his “profit.” On the profit in a small company, Section 199A says he can take 20% of his profit tax free. That means he takes $20,000 away from his $100,000 profit and gives it to himself without paying a dime of tax on it.

That means he will put in the bank a whopping $35,300 ($15,300 + $20,000) more than he actually made when he ran his consulting business through the C Corporation. Just in the last 7 years, since 199A was passed, he lost over $250,000 in income. That’s a tragedy. His accountant should be sued for malpractice. But, I see this tragedy over and over again.

Sadly, your accountant will not advise you. Because they become liable for malpractice as soon as they give you any advice, they keep their mouth shut. You can’t get them for malpractice if they just take your numbers, plug them in the computer, and spit out your taxes.

You have to know this stuff on your own. I guarantee this guy’s accountant will never tell him anything. (It has been over 30 years and the accountant has never said a word.) I guarantee your accountant will never tell you either.

You don’t have to prepare your taxes, but you have to prepare your numbers all year long. My Tax Summit will take four hours on November 20, and I’ll tell you, the Tax Summit is already almost full from folks who have put their name on the registration list. The Tax Summit is a zoom meeting, but we limit the number of folks, so we can interact with everybody.

Ben Rucker, former IRS special auditor/agent will be with me. In case you didn’t know, I am a US Federal Tax Court Attorney, and I have been solving tax problems for over 40 years. Yes, I am old. 

Register for the Tax Summit at https://legalees.com/product/tax-summit/ and prepare to get more money. If there isn’t a space, call and put your name on the list for the next one. You’ll get a recording of the Summit.

You’re working as hard as you can, but we can get you more money by showing you how to cut your taxes. Yes, this applies especially to real estate investors and small businesses. Remember, all you professionals are actually small businesses. See you there.