How Can You Make the Most of Your C Corp?
C corporations certainly have their drawbacks, like the dreaded double taxation problem. Income is taxed once at the corporate level and once at the shareholder level—but that’s not the end of the tax planning road. C corps do come with a tax rate of 21%, which can be attractive to high-income taxpayers who pay 32%, 35%, or 37% in individual income tax. By knowing the right tax strategies, you may be able to leverage that 21% corporate tax rate to your advantage. This is especially true if you are considering transferring real estate, equipment, stock, or another asset to your C corporation.
So You Want to Transfer an Asset into Your C Corp…
One perk of a C corporation is the opportunity to contribute an asset to the business tax-free. However, benefiting from this perk is a bit more complicated than “make the transfer and call it a day.” You’ll want to start by asking a number of key questions:
- Who owned the asset before? If it was owned by another business (or sole proprietorship), did that business depreciate it?
- What is the owner receiving in exchange for that asset?
- What is the C corporation’s long-term plan for the asset? Will they sell it? Distribute it back to the shareholder at some point? Something else?
Answering these questions can help you steer clear of potential tax pitfalls.
What to Know Before Contributing an Asset
Before you contribute an asset to your C corporation, take a moment to think through the past, present, and future of that asset.
What if the asset has already been depreciated? Then the asset’s current value has been lowered, at least from a tax perspective. For example, if a piece of equipment was purchased for $200,000 and has been depreciated by $140,000 over time, the current value (also called the adjusted basis) is now $60,000. So what happens when the asset is transferred into the C corporation? That depends on a few key factors…
What if the contributing shareholder owns a majority of the company? They might be in a great position to get that tax-free contribution. The necessary requirements here are that:
- The shareholder must hold at least 80% of the company’s stock
- The shareholder must receive 100% stock in exchange for the asset.
If these requirements are met, the transfer is tax-free!
What happens when the C corporation sells the asset? As with any sales, this depends on whether the business makes any money on the asset, keeping in mind that depreciation lowers the value of the asset. If there is a gain, the C corporation will pay that 21% tax.
Another thing to look out for is the possibility of recapture. Recapture means that the IRS has determined that you received more depreciation deductions than you should have based on the sales price of the asset—and now you have to pay it back. This can still be a favorable tax situation because C corporations only pay that 21% corporate tax, which is better than most individual income tax rates.
What if the C corporation decides to distribute the asset back to the shareholder at some point? This is where you’ll really have to look at the facts and circumstances of your situation. Is the fair market value higher than the asset’s adjusted basis? What is the shareholder’s current stock basis in the company? Is this a regular distribution or is the C corporation liquidating, meaning ending completely? Your answers to these and more questions will determine how much and what type of taxes you’ll owe.
Are Assets an Asset to Your Tax Plan?
Contributing assets to a C corporation in a tax-advantaged way is possible. The same is true when it comes time to sell or distribute that asset. While you cannot often avoid all taxes, you can sometimes prevent or delay certain taxes with advance preparation. If you know that a certain move, like selling the asset, will trigger an unusually big tax this year, consider selling it another year. For instance, if your company has large losses to deduct one year, that might be the ideal time to sell an asset and take on a big gain—and big capital gains taxes. Before you make your next move, consult a tax professional on how to best prepare for the tax consequences.
We Know C Corporations
One of the benefits of working with a professional from the American Institute of Certified Tax Planners is that we train tax planners to understand how entity type impacts your tax bill. We don’t rely on quick fixes and the over-simplified “tax hacks” that tend to fill the internet—far from it. We know the signs to look for before recommending a tax strategy, and we know the right steps to take to implement it.
Don’t wait until next tax season to start formulating your plan. Reach out to a Certified Tax Planner today!
