Opportunity – GatesMoore accountants discovered a one-time opportunity for an orthopedic practice to change a year-end distribution from one form of payment to another greatly reducing tax liability for both the corporation and the individual shareholders.
Process – By carefully reviewing the practice financials, GatesMoore accountants were able to switch a year-end payment from a bonus payment to a dividend payment.
Result – The individual owners of the practice realized a $60,000 tax savings.
AHA Moment – GatesMoore identified a $300,000 carry-over loss on the books that continued to be carried forward each tax year. They were able to apply this loss in a way that reduced the C-Corporation’s tax burden and paid out monies to shareholders in a dividend payment, greatly reducing individual tax burdens as well.
The Story – A C-Corporation is taxed at a 35% federal rate plus applicable state rate on any taxable income amounts which exist at the end of a fiscal year. Typically this amount is reduced or eliminated through bonus payments to principals that in essence reduce the C-Corporation’s taxable income which in turn reduces its corresponding tax burden. Bonuses are taxed to the individual shareholders typically at rates topping 40%. Common sense would say to pay individuals dividends in lieu of bonuses since dividends are taxed at a much lower 15% rate. One problem – a dividend payment is non-deductible and therefore does not reduce the C-Corporation’s tax liability. So while individual shareholders may benefit from a lower tax burden they are paying for it through a larger tax burden for the corporation.
By carefully reviewing an orthopedic practice’s financials and prior year income tax returns, GatesMoore accountants identified a $300,000 carry-over loss that was being carried over year-to-year and not being used to offset any year-end surpluses. In this one-time situation, GatesMoore was able to allow the practice to pay shareholders with dividends greatly reducing their tax burden. While a dividend payment cannot reduce the C-Corporation’s tax liability, the carry-over loss could. So in this case it was applied. Result – a $60,000 tax savings.