To expand on yesterday’s topic of corporate taxation of constructive dividends:
What can you do to avoid a constructive dividend and the double taxation that comes with it?
1. Document any loans to the corporation with a payback schedule. There will have to be interest but with the low rates today it shouldn’t be much. Then you can repay the loans tax free. Document in the corporate minutes.
2. Take salary. Not the best option, but all owners and officers should take salary anyway. The corporation get the deduction for the salary and no double taxation occurs. You do have payroll taxes to pay.
3. Pay rent to the owner for the corporate office. If you have a building or a room the corporation uses for an office you can reduce corporate earnings plus not have to pay payroll taxes on the money distributed.
4. Make sure the corporation reimburses the owners for all business expenses they pay. Set up an expense reimbursement form and put in corporate file for tax purposes.
5. Set up a corporate retirement plan. You will have to include some or most of your employees in this but there are ways to set up to maximize key people and officer contributions.
6. Become an S Corporation. There is no double taxation because all the income flows through to the owners and is taxed at their rates, but there may be some payroll tax savings.
Okay get out there and separate from your entity and don’t worry about double taxation again.