Pub. 7 2018 Issue 3

April/May 2018 19 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s BANK REGULAR VS SUB S TAX If all income distributed Regular Corp Regular Tax If 20% benefit only Sub S tax AdditionalBenefit and Capital Gain Benefit from non-taxable-muni Net Sub S Benefit Income 1000 1000.00 Tax to corpor at 21% 21% 210.00 210.00 1000.00 0.00 Income after tax 790.00 0.00 1000.00 1000.00 Distribution to shareholders 790.00 1000.00 1000.00 Net remaining in corporation 0.00 1000.00 Tax on distribution at 20% dividend rate 158.79 158.79 Tax on total income at 37% 296.00 296.00 296.00 Potential investment income tax 3.80% 30.02 30.02 38.00 38.00 Net after tax to shareholders/tax 601.19 398.81 666.00 334.00 64.81 Additional basis/capital gain tax savings at 20% 20% 200.00 200.00 1. The Sub-S basis increase and tax benefit from undistributed income should be present valued to expected year of sale. 2. Sub-S basis increase and potential tax benefit on sale from non-taxable income such as muni-bond income should be present valued to expected date of sale. 3. Generally, highly appreciating assets (ie, real estate) are kept out of a regular corp to avoid double tax unless the plan is to sell the stock in the regular corp. 5. Since Sub-S owners have a variety of different effective tax rates that may be lower than the max rate of 37% used, Sub-S can be more beneficial than the examples shown. 6. If a business needs to retain most earnings for growth over a long period of time and does not have a large amount of muni income, then the regualar corporation route may make the most sense. 7. The 20% benefit rule (ie, 20% of pass thru income non-taxable) phases out between $315,000 and $415,000 joint income for income from a financial service entity (banks are eligible, however). 8. The 3.8% investment income tax only applies to passive income if a Sub- S(ie, active in the business owners do not have to pay), but does apply to dividends if a regular corporation even if an active owner. If total joint income is less than $250, 000 the tax does not apply. If 50% of income distributed Regular Corp Regular Tax Sub S Sub S Tax AdditionalBenefit and Capital Gain Benefit from non-taxable-muni Net Sub S benefit Income 1000.00 1000.00 1000.00 Tax to corp at 21% 21% 210.00 210.00 0.00 Income after tax 790.00 1000.00 Distribution to shareholders 50% 395.00 500.00 Net remaining in corporation 395.00 500.00 Tax on distribution at 20% dividend rate 20% 79.00 79.00 Tax on total income at 37% 296.00 296.00 Potential investment income tax 3.80% 15.01 15.01 38.00 38.00 Net after tax to shareholders 300.99 166.00 Amount remaining in corp 395.00 500.00 Net after tax to shareholders/ tax 695.99 304.01 666.00 334.00 - 29.99 Basis increase on non distributed income at capital gain rate 20% 500.00 100.00 Additional basis/capital gain tax savings at 20% 20% 200.00 200.00 CONSIDERATIONS