Leveraging the New Flat 21% Tax Bracket for C-Corporations

Submitted by Federated Insurance

Tax rates for C-Corporations are at an all-time low. Since the tax tide frequently changes, now might be a good opportunity to take advantage of these lower tax rates before they go back up.

Previously, C-Corp were taxed at up to 39% (federal).  Some may have moved this higher taxed income into lower individual tax brackets by increasing the owners’ salaries, paying bonuses and paying higher rent on personally owned business real estate.

Now, the C-Corp is in a 21% bracket no matter how much income it generates. The employee/shareholders, however, could be in a personal federal tax bracket as high as 40.8%. A bonus could lead to higher overall tax.

Cross-Purchase Funding
Life insurance funding for a cross-purchase buy-sell agreement has traditionally been done with bonuses paid to the shareholders. This may no longer be advised. In addition to higher individual tax rates, the bonus may be subject to FICA and other taxes that both the business and employee must pay.

Consider a dividend instead of the bonus. While a dividend is not tax deductible to the business, the shareholder is taxed at 0%-20% (depending on other income), rather than at his or her marginal tax rate.  Additionally, there are no FICA or other payroll taxes on dividends. The dividend’s “double taxation” (once at the corp level and again at the shareholder level) maybe less than the taxation of a bonus.

Accumulated Earning Tax
Businesses have tended to accumulate earnings inside the company in an effort to avoid the double taxation of a dividend to the shareholders. Now might be the time to pay out some of the accumulated earnings while corporate tax rates are low and dividends are taxed at a favorable rate.

Split Dollar Life Insurance
If a C-Corp shareholder needs personal life insurance, consider an endorsement split dollar arrangement.  Premiums on a company-owned policy are paid with corporate after-tax (21%) dollars and the cash accumulation in these policies can be used to fund a non-qualified retirement plan or other benefit plan for the owners. The plan can also provide some or all of the death benefit to the owner’s beneficiary income tax free.

Talk to your attorney and/or CPA for information about how the new corporate tax rate might impact you and your business based on your individual situation. 

This article is for general information and risk prevention recommendations only. It should not be considered legal, coverage, financial, tax or medical advice. Qualified counsel should be sought regarding questions specific to your circumstances.