1. Capital repayments: When a closely held corporation repays debt that has been capitalized, it is not treated as a dividend. The corporation can also deduct the interest paid on the debt. This assumes that the debt has been properly documented and that the corporation’s debt-to-equity ratio is not excessively high.
2. Salary: Reasonable compensation received for services rendered to the corporation is deductible by the business but taxable to the recipient. This also applies to compensation in the form of rent for the use of property. The amount of compensation must be reasonable in relation to the services rendered or the value of the property provided.
3. Rent: If the owner receives rent from the corporation for the use of property, it is deductible by the corporation. However, the amount of rent must be reasonable in relation to the value of the property.
4. Loans: If the corporation lends money to the owner, the repayment of the loan is not treated as a dividend and the interest paid by the owner may be deductible.
5. Fringe benefits: Providing tax-free fringe benefits, such as health insurance, to the owner and employees is a tax-efficient way to withdraw cash from the corporation. 1. When withdrawing cash from a corporation through a loan, it should be properly documented and made on comparable terms to an unrelated third party loan.
2. Fringe benefits can be obtained as a tax-free alternative to cash withdrawals, but should be provided on a nondiscriminatory basis to other employees.
3. Selling property to a corporation can be a way to withdraw cash, but certain sales should be avoided to prevent loss disallowance or ordinary income treatment. An independent appraisal may be needed to establish the property’s value. 1. Many taxpayers can benefit from taking advantage of tax deductions and credits.
2. It’s important for taxpayers to stay updated on changes to tax laws and regulations.
3. Tax planning can help individuals and businesses minimize their tax liabilities.
4. Taxpayers should consider consulting a professional for tax advice and assistance.
5. Understanding tax implications can help individuals make informed financial decisions.
Making Withdrawals From Your Closely Held Corporation That Aren’t Taxed as Dividends
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