Plan Earnings Distributions For Best Tax Results

Plan Earnings Distributions For Best Tax Results

Consider these tax factors when making decisions about distributing corporate earnings.

  • Corporate earnings paid out to you as compensation are included in your taxable income, but are deductible by the corporation. Thus, the income is taxed only once - to you.
  • Individual tax rates may be higher in 2013 and later. Take this factor into account when planning year-end 2012 bonuses.
  • If you payout earnIngs as compensation, be aware that the compensation must be "reasonable" for it to be deductible by the corporation.

The IRS can assess a corporate accumulated earnings tax penalty on companies that accumulate excessive amounts of earnings and profits. This penalty is 15% In 2012. It's scheduled to rise to 39.6% (the same as the top Individual marginal tax rate) in 2013.

If your corporation has built up significant earnings and profits, distributing excess cash as dividends in 2012 may be advantageous since shareholders are taxed on qualified dividends at no more than 15%. (Requirements apply.) Absent further legislation, dividends will be taxed at ordinary rates as high as 39.6% in 2013. A distribution may also help the corporation avoid the accumulated earnings tax penalty In 2012 and the higher penalty rate currently scheduled for 2013. But be sure a thorough analysis has been performed before making a decision.


An easy way to lower your business's taxable Income is to increase deductions. So take care not to overlook any deductions your business may be entitled to claim .

If your company is a C corporation other than a personal service corporation,- you can estimate your corporation's regular 2012 federal Income taxes using this table.
Corporate Tax Rates.
If taxable income is over But not over Your tax is Of the amount over
$0 $50,000 15% $0
$50,000 $75,000 $7,500 + 25% $50,000
$75,000 $100,000 $13,750 + 34% $75,000
$1 00,000 $335,000 $22,250 + 39% $1 00,000
$335,000 $10,000,000 5113,900 + 34'1\ 5335,000
$ 1 0,000,000 $15,000,000 $3.400,000 + 35% $10,000,000
$ 15,000,000 $ 18,333,333 $5,150,000 + 38% $ 1 5,000,000
$1 8,333,333   A fI.t 35%  
*Personal service corporations pay a flat 35% tax.

Use Losses To Your Advantage

No business owner welcomes a net operating loss (NOL). However, If you expect your company to show a loss this year, plan to use it to your best tax advantage. An NOL generally may be carried back two years. By carrying back an NOL, you may secure a refund of income taxes paid for those years. Unused NOLs may be carried forward to offset future taxable income for as long as 20 years. A speCial election to forgo the carryback period is also available.

Identify any bad debts Ilngenng in the aftermath of the economic downturn. If your company uses the accrual method of accounting, you generally may deduct business bad debts when they become totally or partially worthless.
You'll need documentation to support the deduction, so be sure to keep good records of your failed collection attempts.

Take Advantage Of "Bonus" Depreciation While You Can

In 2012, bUSinesses can claim a firstyear depreciation "bonus" equal to 50% of the adjusted basis (or cost) of qualified property acquired and placed in service after December 31, 2011, and before January 1, 2013. Many types of new machinery, equipment, and other fixed assets qualify. Note:

  • The 50% bonus depreciation is subtracted from the property's cost basis before the regular first-year depreciation is computed.
  • While real estate generally won't qualify for the depreciation bonus certain improvements to the interior of a leased nonresidential building may qualify.

Page 13