Originally Posted by seeville
#1;I will probably dissolve my 2-person c corp in the next year or so. Is there any reason not to take the $$ in retained earnings as salary in 2014 to reduce retained earnings?
#2;I realize this will result in a NOL, but do I care since the corp is going to close anyway?
There is about $20k there now.
#1;I guess not that I know of; as you can see, for smaller companies ,reported profits result in retained earnings, a type of equity in Sch L of 1120. As years roll by, these accumulated after-tax earnings increase the retained earnings account, unless they are distributed.So,r/e in your C corp will eventually be taxed again, either as dividends, salary, bonuses or as liquidating dividends when the corporation is terminated. Of these four choices, the most favorable is a distribution of salary and bonuses, which are deductible as compensation at the corporate level, although they are subject to additional employment taxes, I mean FICA tax. Dividends are not deductible at the corporate level and are often frowned upon in smaller entities for their lack of deductibility. Your corporation has already paid income taxes on those earnings. Paying income taxes twice is really the worst thing you could do. as you cn asee, many small C corps avoid this double tax problem by simply paying out all their profits as salaries and bonuses.These amounts are tax deductible so the corporation ends up with no profits and doesn't have to pay any corporate income tax.The owners then have to pay income tax at individual rates on their salaries, much like any other business owner. Corporations in the United States can deduct their business expenses from their income tax, but the dividends they pay to the owners of their equity are not treated as expenses. Dividends, then, are not deductible.
To avoid paying dividends which are subject to double taxation, another strategy is to pay shareholders consulting fees. Of course, you have to make sure there is some genuine consulting. These consulting fees will, however, be subject to social security and Medicare taxes. you may even add the dividend to your cost of the stock you already own. But,I think you also owe the tax on the phantom dividend; phantom stock is essentially a cash bonus plan, although some plans pay out the benefits in the form of shares. Phantom stock can, but usually does not, pay dividends. When the payout is made, it is taxed as ordinary income to the EE and is deductible to the ER. I am NOT sure however, in general, phantom plans require the EE to become vested, either through seniority or meeting a performance target.
#2; Many small to medium corps zero out their earnings to claim salaries and bonuses, plus other deductions, that significantly reduce the annual profit ,retained earnings of the corporation.Even if the c corp has NOL and dissolves , you, as the stockholders, can’t take the loss against your taxes. NOL if corporation C dissolves evaporates into thin air;so,upon dissolving a C Corp entity, the NOL goes poof . It only goes poof b/c there's no entity to which the NOL can be carried (forward).
note;ingeneral,A corporation figures an NOL in the same way it figures taxable income. It starts with its gross income and subtracts its deductions. If its deductions are more than its gross income, the corporation has an NOL.
However, the following rules for figuring the NOL apply.
A corporation cannot increase its current year NOL by carrybacks or carryovers from other years.
A corporation cannot use the domestic production activities deduction to create or increase its current year NOL, including any carryback or carryover.
A corporation can take the deduction for dividends received, explained later, without regard to the aggregate limits (based on taxable income) that normally apply.
A corporation can figure the deduction for dividends paid on certain preferred stock of public utilities without limiting it to its taxable income for the year.