Protecting a business, property or personal wealth is an important consideration for many people. At Anker, Reed, Hymes, Schreiber and Cohen, A Law Corporation, we pride ourselves on being a different kind of law firm – one that measures success by its value to clients. Since 1974, our firm has provided business law, real estate, estate planning and litigation services to individuals, families and businesses throughout Southern California.
This is part of fourth section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding the corporate retirement plan.
A corporate retirement plan may include a pension plan, profit-sharing plan or combination of both. A pension plan is “established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees, or their beneficiaries, over a period of years (usually for life) after retirement.” (Blacks Law Dictionary)
A profit-sharing plan is established and maintained by an employer to provide for the participation in the profits of the company by the employees or their beneficiaries. A corporate retirement plan may be qualified or non-qualified in order to take advantage of the tax benefits available. If the corporate retirement plan is qualified according to § 401, special tax status attaches. First, the amount of the contribution will be deductible to the corporation under §404(a)(1) for pension plans and § 404(a)(3) for profit-sharing plans. Second, “Any amount actually distributed to any distributed by any employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed”. (§ 402 Supp., 2000) Therefore, § 402 provides for tax deferral until the corporate retirement plan distributes to the beneficiary. For example, if a corporation makes a $10,000 contribution to a corporate retirement plan in the name of the individual employee, the corporation will be allowed to deduct this amount from taxable income and the individual will not be taxed on this amount in the year of the contribution! The contribution is placed into the corporate retirement account where it appreciates tax-deferred; the individual will be taxed on the amount when the retirement account distributes its corpus to the individual participant.
For the noncorporate taxpayer, usually a member of a union pension plan, the only deductible retirement contribution available would be an Individual Retirement Account (IRA). The deductibility of IRA contributions is limited when the individual is an active participant in a retirement plan maintained by an employer. For such individuals the IRA contribution is phased-out at certain AGI levels ($31,000-$41,000 for 1999).
Therefore, the noncorporate taxpayer may not receive the current tax benefit of the contribution because the contribution will be made with after-tax earnings. The corporate retirement plan has no comparable limitation.
* For specific inquiries regarding a business legal matter that you may have, you are contact our Business Lawyer in Los Angeles.
This is the third section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding deduction limitations of the corporation and individual.
The corporation, on the other hand, is not affected by the § 67 limitation. A corporation will be allowed a one hundred percent deduction on itemized deductions. Therefore, in the foregoing example, the corporate taxpayer will be able to deduct the full amount of $50,000 without limitation. The corporation has effectively just saved the individual taxpayer approximately $4,000 in federal taxes and $1,000 in state taxes.
The subject of deduction limitations becomes more significant when addressing the issue of deductions allowed for medical expenses. An individual taxpayer can deduct the expenses for medical care of the taxpayer, his spouse, or a dependent to the extent that the expenses exceed 7.5% of the adjusted gross income. Using the previous example, if the individual had medical expenses of $25,000, they are not deductible because only those expenses that exceed 7.5% of the adjusted gross income are deductible. With an adjusted gross income of $500,000, the individual would need to have medical expenses of at least $37,500 before any deductions may be taken. In applying the applicable federal and state tax rates, the individual with $25,000 of medical expenses would pay a tax of approximately $12,500 ($10,000 to the federal government and $2,500 to the state government).
* For specific inquiries regarding a tax planning legal matter that you may have, you are welcome to visit our Los Angeles Business Attorney services page.
This is part 5 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.
“Partnerships and limited liability companies are treated for tax purposes as conduits whose income and deductions pass through to the partners or members as they are realized, with the various items retaining their original character in the process.” (Fundamentals of Corporate Taxation 703, 4th ed. 1997) The partnership will still file an income tax return with the government, but this tax return will solely be for informational purposes. The individual partners pay the actual tax.
For example, a partnership that has taxable income of $1,000,000 for the taxable year will pay no tax on this income. The partners will pay the tax. Should there be two partners, each partner will have taxable income before individual deductions of $500,000. It is important to note that percentage of control in a partnership may be negotiated amongst the partners, in that a partnership may not always be 50/50. For this analysis, and in the interest of simplicity, we will assume a 50/50 partnership. This amount does not include amounts paid by the partnership to the partners as compensation, or in any other form, received during the taxable year.
In applying § 1 (c) of the Internal Revenue Code, each partner’s assessed tax before individual deductions will be $77,485 plus 39.6% of all income over $250,000. Therefore, in the absence of any other personal deductions, each partner’s tax will be approximately $176,485. The partnership itself will not be subject to tax, but “the persons carrying on business as partners shall be liable for income tax only in their separate or individual capacities.” (I.R.C. § 701, Supp. 2000).
* For specific inquiries regarding a tax planning legal matter that you may have, you are welcome to visit our Los Angeles Tax Planning Attorney services page.