Archive for October, 2010

How A Corporation Is Taxed

Wednesday, October 13th, 2010

S Corporation income and losses pass through to the shareholders and are recorded as part of their individual 1040 tax return.  A C corporation, however, is subject to separate tax procedures and rates by the federal and state taxing authorities.  A corporation is taxed separately on its own income.  This causes some advantages and some disadvantages, all of which must be considered carefully.

Corporate taxation may result in “double taxation.”  Income received by the corporation is taxed at the corporate level according to the corporate tax rates then in effect.  The profit remaining after taxes is then available to be distributed to the owners or shareholders as dividends, which are taxed again as personal income to the shareholder.  This double taxation is recognized as a distinct disadvantage to the corporate form, as compared with other forms of business enterprise.

Larger corporations with many shareholders simply accept the disadvantage, but in smaller, closely held corporations, double taxation can be minimized.  One way to minimize the effect of double taxation is to pay the shareholders a reasonable salary.  Whenever shareholders are officers or employees of the corporation, and this is frequently the case in smaller organizations, they may be paid reasonable salaries that are deductible as a corporate expense, and thereby reducing or eliminating the amount disteributed as a dividend.  Call now so we can plan your tax strategies before the end of the year!

Do You Have To Give Up Control To Accomplish Your Planning?

Wednesday, October 6th, 2010

There is one common theme we hear from every person who begins the planning process.  Everyone wants to maintain control.  In fact, one of the most important things about a good estate plan is that it enables you to do exactly that.  It protects your power to make decisions – during life, during periods of disability, and even after death.  Call me and I’ll tell you more!

So, You Heard If You Title Your Assets Correctly, You Don’t Really Need To Plan?

Sunday, October 3rd, 2010

First, the question seems to assume that planning is only about assets.  As discussed before, plans are used for many other purposes beyond passing money and personal items to the next generation.  Nevertheless, since assets are also involved, this is a good quesion.

 There are seveal ways in which property can be titled.  For example, property can be owned in one name by one person.  It can also be owned by more than one person in joint names under one of four main structures:

  1. As joint tenants with rights of survivorship;
  2. As tenants by the entireties (a form of joint tenants property between husband and wife that is available in certain states);
  3. As tenants in common; and
  4. As community property (a form of ownership between husband and wife that is mandatory in 9 states and optional in Alaska).

The type of ownership will determine how your interest in the property passes at your death.  Title equals results.  For example, a will controls only those asset owned by an individual in his or her own name.  Your interest in joint tenancy property passes by operation of law at your death, to the surviving joint owner, even if you tried to leave your interest in the property to someone else though your will.  Both wlls and joint ownship are generally anticipating a death transfer.  Ownership in a trust allows for lifetime planning as well, and includes specific transfer instructions that joint ownership cannot.

So, while joint ownership provides a method of transfer when the first spouse dies, it does nothing on the second death because the ownership has passed to one individual.  And, in the event of a common disaster (husband and wife killed in in a car accident for example) if property is owned jointly without an accompanying plan, the property would be subject to intestacy law.  That means the state would decide how the property will be distributed to the remaining heirs.