
Under the Trump Tax Plan, We Might All Want to Become Corporations - tommoor
https://www.nytimes.com/2017/04/28/upshot/under-the-trump-tax-plan-we-might-all-want-to-become-corporations.html?action=click&contentCollection=Asia%20Pacific&module=Trending&version=Full&region=Marginalia&pgtype=article
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valuearb
So I incorporate a C corp to provide my services with, so I only pay 15% taxes
on what my employer pays me. But in order to spend the other 85% I have to
dividend it to myself. There I owe 15-20% more in taxes (Edit: unless I'm in
the very lowest bracket) for a total of 28-32% (edit: recalculated realizing
dividend rates are 20% at high brackets).

The author should double check that he's deep in the 35%/39% brackets or this
makes no sense. The 15% corporate rate would be on every dollar of profit,
just as the 15% dividend rate would be on every dollar of distribution, so
effectively he's be paying 30% on nearly 100% of his income instead of 10% on
first $9k, 15% on next $20K, 25% on next $50k, 28% on the next $100k, etc.

If you make $191k, you owe $46,500k in taxes (obviously ignoring deductions).
That's total of 24%. If you make $416k, you owe $121k in taxes, or 29%.

And this ignores the fact that the IRS doesn't let you run a profitable
corporation without paying a reasonable salary. Even if I can only pay myself
half what my employer pays the corp, all of that paycheck is at normal income
tax rates plus payroll taxes.

Lastly, note that this "scam" exists today. The federal C corp tax rate on
first $50k in income is 15%. But obviously it's not worth it.

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maxerickson
They are talking about applying the rate to pass through entities.

The assumption people are making is that after the change only the corporate
rate would apply to that income, it wouldn't be taxed again as personal
income.

It doesn't matter, the bullet list they put out is a press release to start
the policy conversation, not anything that is going to get through Congress
intact.

~~~
valuearb
Pass through entities means the entity doesn't pay taxes, it's owners do. And
they always pay at personal income tax rates, so 39% for the high earners.
This "loophole" exists today, again you have to pay yourself a reasonable
salary but most sole proprietorships and tightly held (like family owned)
businesses are structured this way.

Either the author is confused about pass through entities, or I am confused
about Trump's proposal, because I'm thought it only affects C corps, not pass
through entities.

Edit: OK, I've re-read it and it was my confusion. The author is claiming that
S corp owners want lower taxes if C corp owners get them, and the author is
entirely correct that would be a huge loophole.

What he doesn't say clearly enough is it's ridiculous on it's face, pass
through entities don't get double taxed already, and because C corps are
double taxed they and their shareholders will still pay as much if not more
taxes than the shareholders of passthrough entities with similar levels of
income. C corps will still pay on average 20% given state taxes, combined with
state and federal taxes on dividends their high income shareholders will
certainly pay over 40% combined.

In CA a highest bracket taxpayer receiving dividends from a C corp would pay
10% State Corporate, 15% Federal, 13% State income, 20% federal dividend, or
47% total taxes on every dollar of profit. If their business is an S corp,
they'd pay 13% state taxes, and 39% federal, which works out to a nearly
identical 47% rate. But for the S Corp, no one pays 39% on all their income,
as I wrote above they only pay around 28% on their first $400k, so again the
pass through entity is going to be lower tax than a C corp even with Trumps
proposed tax cut.

For example, if you made $1M after deductions, you would pay $350k in federal
income tax, or 35% even though you were deep in the 39% bracket, even at the
top CA tax rate your total income taxes would be around 44% with a pass-
through. Significantly less than a C corp with Trump's 15% rate.

~~~
maxerickson
There have definitely been remarks about applying the proposal to pass
throughs.

I don't think it is really all that interesting of a discussion because the
plan isn't fleshed out enough.

In any case, they do have the goal of substantially altering the tax system, I
guess what we have now isn't necessarily instructive about the shape it will
take.

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andriesm
In my country they solve this, by requiring your sub-contracting meets certain
criteria before it will be taxed as a corporation, rather than as an
individual simply using this as a way to disguise salaried income. Did you
receive income from more than 1 client, was more than 80 percent of the income
from 1 customer. Do you employ less than 3 people? Does thr nature of the work
require fixed hours or do you set your own. I'm simplifying because I am not a
tax accountant, but it is basically a combination od these criteria that
determine whether your one person service "business" is taxed like a business.

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tinus_hn
So the sovereign citizens had a point after all!

