Corporate vs Individual Tax Rates

M

mjt

I was playing around this weekend with some numbers, trying to figure out at which income levels it would be more advantageous to pay taxes as a corporation or as an individual. I realize that there are other considerations in deciding whether to form a corporation besides tax rates; I also realize that there may be more deductions one could claim having a corporation. Assuming however all things being equal, here is a rough breakdown.

Between roughly 30,000 and 123,000 net income, the corporate filer pays less taxes.
From 123,000 to 517,000 the individual filer would pay less taxes.
Above 517,000 the corporate filer would pay less taxes.

Net Inc Personal Corporate Advantage Difference
50,000 9,846 7,500 Corp 2,346
100,000 24,315 22.250 " 2,065
122,944 31,198 31,198 Same
150,000 39,753 41,750 Individual 1,997
200,000 57,253 61,250 " 3,999
250,000 74,753 80,750 " 5,997
300,000 92,253 100,250 " 7,997
335,000 105,509 113,900 " 8,391
350,000 111,299 119,000 " 7,701
400,000 130,599 136,000 " 5,401
450,000 149,899 153,000 " 3,101
500,000 169,199 169,199 " 801
517,420 175,923 175,923 Same
550,000 188,499 187,000 Corp 1,499
600,000 207,799 204,000 " 3,799
650,000 227,099 221,000 " 6,099
700,000 246,399 238,000 " 8,399
750,000 265,699 255,000 " 10,699
800,000 284,999 272,000 " 12,999
850,000 304,299 289,000 " 15,299
900,000 323,599 306,000 " 17,599
950,000 342,899 323,000 " 19,899
1 MLN 362,199 340,000 " 22,199

Above 517,000 the tax advantage of the corporation is 4.6%.

335,000 is the least advantageous net income level to file as a corporation. However, if you can find over 21,500 in deductions as a corporation at that level that you couldn't find as an individual, it would be advantageous to file as a corporation, from a tax standpoint only.

I don't know whether states have different tax rates for corporations vs individuals. It probably isn't that big a difference if there is one.
 
Well, I knew my table wouldn't line up the way it did when I was typing it in. I put spaces inbetween the numbers, but they didn't post that way.

If you're having trouble reading it, I'll just take one line and interpret. At 400,000 net income, the personal filer pays 130,599; the corporate filer pays 136,000. The tax advantage is to the personal filer for 5,401.
 
The next obvious question is that if you form a corporation
to take advantage of the lower tax rates then you still have
the issue of how to transfer and use this money for your
personal life. If you pay yourself a salary from the
corporation then you will be taxed twice, once for the
corporate tax and then at the individual tax level. (probably
with some corporate operating deductions for the salary).

For trading, corporations do offer advantages for those with
family situations. They allow you to deduct medical insurance,
retirement stuff, and other items easily. For a trader forming
a corporation simply for tax savings compared to a
partnership or individual rates; it may not have advantages for
a single filer.

Just my thoughts.... Note I am NOT an accountant and am
not qualified in any way to judge tax situations.

- Greg
 
Originally posted by gwb-trading
The next obvious question is that if you form a corporation
to take advantage of the lower tax rates then you still have
the issue of how to transfer and use this money for your
personal life. If you pay yourself a salary from the
corporation then you will be taxed twice, once for the
corporate tax and then at the individual tax level. (probably
with some corporate operating deductions for the salary).
- Greg
More...

Actually corporations salaries are 100% tax deductible so there is no double taxation on money that is distributed that way. The double taxation comes when earnings are distributed via a dividend. Most expenses that you can take as a corporate trading business could also be taken by an individual on schedule C as in individual trading business (and you don't have to worry about getting the money out).

The thing that is left out of the original analysis is that the salary you draw from your corporation would be taxed as ordinary income. I don't know that corporations get a beneficial tax rate for captial gains. Individuals do get this as long as they haven't elected mark to market. So the rates might be different (in favor of the individual) from what you figure if the tables you posted are based on ordinary income tax rates and not capital gains rates for individuals (of couse assuming no mark to market election).

To get tables to line up try using the
Code: 
[code] Tag
 
all in one, when you are US citizen or resident, it is better to file as an individual or S-Corp or LLC (if several are involved).
The advantages of a C corporation are few (and were mentioned earlier in the thread).
However, as an individual you should consider ' 'mark to market' election (unless you have big long term positions you want to be sure to protect (because you can't offset losses of marked to market trading to long term stocks). Anyway, usually traders should consider 'mark to market'.

as usual consult a specialist, a mistake can cost you big. but it's not so complicated.

tntneo
 
The state corp tax structure on corps varies widely, you have to be really carefull with this and consult only with a cpa in the state where you pay taxes.
 
Corps are not formed for tax avoidance reasons . Corps are formed because of the limited liability they present as they are are considered an ongoing living entity. If you make what the feds consider "exess profits", a measure of $$ in the corp kitty beyond that which the feds consider neccessary to run the biz, you will be forced to take it out and pay taxes on it. The irs is not stupid and knows what you're trying to do. I'm not an attorney, I'm a serial entrepenure who has started and maintains an interest in many biz's. You must examine this deeply in your state of residence. You really want to play with something look into how many states protect your retirement pensions, 401k's and ira's from being attacked. That's why OJ Simpson moved to Florida . Arizona is another one that protects retirement funds. What if your 17 year old kid gets drunk at college, kills a couple people while driving and the atty. discovers you have a couple million. That's the kind of crap to think about.
 
that's a great point banjo. I do have a C-Corp, but could not find a way to say why it was interesting (besides retirement plans etc..).
It is a separate entity indeed. I believe the limit is $150 000 you can keep in without distributing, for a trader corp (other corps it's about $250k I think).
Anyway, a salary is legit deduction from profits (therefore not fed or state taxable.. it can be a management fee too if you are owner, not necessarly a salary. it does not have to be a dividend (which is the worst).
you get also automatically (kinda) trader status when you do things in a C Corp. As an individual it's a pain to be sure you are safe to request trader status. For a C-Corp it's a no brainer (it's a business!).

However, many specialists do recommend S-Corp or even regular 1040 for traders. That's why I repeated that and not use my own example as something to follow.
 
The retirement plans are a very attractive part of starting a trading corporation. However don't S Corps have the same ability to contribute to retirement plans that C Corps have or am I mistaken? And for that matter would an LLC or even a partnership be able to contribute to a retirement plan also?

Socking away up to 65K in taxable income in a KEOGH (if my memory serves) and less for the SIMPLE plan (but easier to administer) is a pretty big incentive to have a retirement plan for trading.
 
Here are the tax implications for an S-Corp versus a C-Corp in
New Jersey. S-Corp regulations vary from state to state. At least
the way I understand them:

In a C-Corp, the Corporation pays Federal taxes on profits. The
stockholders then pay taxes on the dividends (1099) when they
are distributed. (Double taxation).

In a S-Corp, the stockholders pay the corporation's Federal taxes
on their personal tax returns. The S-Corp issues each stockholder
a Schedule K-1. The corporation is exempt from Federal Taxes.

In your own trading business, drawing a salary is not an issue
because it is a business expense which reduces profit - which in
turn reduces tax liability.

However, if one draws a salary and also increases his trading
account balance by $100,000, the S-Corp is a major advantage.

A C-Corp would have to pay Federal taxes on the $100K. Now,
when what's left of it is distributed to the shareholders (you), you
must pay personal taxes on that income.

A S-Corp would pay virtually no Federal tax. You would pay tax on
the $100K - wether you distributed it or retained it.

A C-Corp may retain earnings and the stockholder is not liable for
person tax until the earnings are distributed.

A S-Corp may retain earnings. The stockholder pays taxes wether
the earnings are distributed or not. The stockholder does not pay
taxes when retained earnings from prior years are distributed
(He already paid the taxes).

One other advantage of an S-Corp is that the stockholders also
can take the loss on their taxes when the company looses money.

It is difficult to switch form a C-Corp to an S-Corp. I don't
remember all the nuiances. What I do remember is that it is much
easier to start out as a S-Corp than it is to convert from a C-Corp
to a S-Corp.

Please don't take any of this verbatim. This is only what I can
remember from my past business experiences. Please consult
with your accountant. Possibly consult with two. Each may have
his own opinion.

Mike
 
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