Tax Smarts: Withdrawing Cash from Your Closely Held Corporation

Tax Smarts: Withdrawing Cash from Your Closely Held Corporation
Categorized as Accounting, Taxes Tagged , ,

You just closed your books on 2019 and got that tax shock. Maybe you paid too much, maybe the business had a huge tax bill. Regardless, it’s time to start planning for 2020 and minimize the double taxation that comes with a corporation. So, how can you withdraw cash from a closely held corporation in a tax-smart way?

How do I pay myself from my business?

You pay yourself either with a salary or with an owner’s draw. Which you choose depends on the structure of your business and will have an effect on your personal and business taxes. You pay yourself a salary just like you do an employee, complete with all withholdings. An owner’s draw comes from the business’s profits or capital distributions. In that case, taxes are paid on the personal tax return rather than having withholdings taken in advance.

What is a closely held corporation and does this work?

A closely held corporation is one in which five or fewer shareholders hold more than 50% of the company’s shares. A small business with an “owner” that is also incorporated will typically be a closely held corporation. So, how do you take money out of a corporation?

C Corporations are subject to double-taxation. That means that the business pays taxes on its profits, and the shareholders then pay taxes on their income from the corporation.  As the business owner, it’s your job to minimize both of those, for both you and your shareholders.

What this boils down to is that owners of sole proprietorships, partnerships, and LLCs will take cash draws and pay taxes on those on their personal tax returns. Officers in a C Corporation will take salaries and shareholder dividends rather than cash draws.

Taking Cash Out of Your Closely Held Corporation

So, here’s the thing with taking that cash out of your corporation. It will either be defined as a dividend — and get that second round of taxes — or some other type of compensation, such as payment for services.

Here’s how you can minimize the tax impact of taking cash from your closely held corporation:

  1. Fund with a loan rather than equity. If you and your group are funding the business, do it with a loan rather than equity. That way, you can make payments on the loan, which is not taxed.
  2. Offer higher compensation and fringe benefits to top shareholders. This allows you to move money to them without it getting taxed.
  3. Lease assets to the business. Create an LLC to own the real estate and other assets that might appreciate in value. Then, lease or rent those assets to the company.

Get Some Advice

As the major shareholder of your closely held corporation, your first strategy is to keep an eye on your corporate tax brackets and minimize that first round of taxes, those on your corporate taxes. Then, you need to find a creative way to take cash out of the business which reduces your personal tax burdens. It’s not as easy to do with a closely held corporation, as it is with a sole proprietorship or an LLC. But don’t let that discourage you. A good tax advisor like ASCEND will help you set all of this up, from business formation to tax planning and help you get the most from your hard work and profits.

Schedule a complimentary consultation today, and let’s start 2020 off on the right tax path. Call ASCEND Business Advisory at 888 297-3321.