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 [...]
Brian’s Tax Musings
If you run your business through a corporation, make sure you treat it as a separate entity. Treating the corporation checking account like your own can lead to a lot of trouble. The IRS and the tax court have treated taking money to pay personal expenses as constructive dividends when the money is just taken without any corporate documentation. This can be a significant hit because of double taxation – the dividend is income to the owner and not deductible by the corporation. Tomorrow I will talk about ways to minimize the tax hit when your corporation makes money.
Brian’s Financial Musings
Okay, you have your investment portfolio allocated among stocks, bonds, real estate, etc and you have at least 20 investments with no more than 4 – 5% invested in a particular item. When do you sell a stock, bond, etc. You need a strategy and the best one I have found is trailing stop losses.Say you have a stock you bought for $10 a share. You decide to keep a 20% stop loss on this stock. if the stock ends the day down 20% from when you bought it, or $8, you sell it the next day. But this is a trailing stop loss, so if the stock goes up to $15 a share, now your stop loss is 20% of the high, so if your stock ends the day at $12, you sell the next day. Waiting until after the close cuts out the intraday fluctuations that occur in the market.So you sold your stock for $12, giving you a profit of $2. You lost some profit on the deal, but gave your stock enough room to continrue to grow. Say the stock went down to $13, then the next day, jumped to $20; now your stop is $16 You [...]