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C Corp Tax Planning
Christopher Hynes, JD, CFP®
Advanced Tax Planning Benefits of Deferred Compensation
When carefully and properly structured, a C Corpora-
tion that works in concert with your pass-through oper-
ating business can help you reduce your federal tax rate
on a substantial portion of your income to 21%. More-
over, using some advanced tax and corporate planning,
clients can receive large amounts of tax-free dollars out
of their C Corporations. Additionally, the C Corpora-
tion can be used to build a discretionary (i.e., none of
the employees of your Pass-Through operating business
need be included) retirement plan using deferred
compensation. To clarify, these benefits are neither avail-
able in Pass-Through Entities nor in improperly struc-
tured C Corps. As always, please do not attempt to do
this at home. For those who are already funding life insurance or
would like to incorporate cash value life insurance as a
piece of their retirement puzzle, this C Corp structure
enables premiums to be paid with 21% after-tax
money instead of 37% post-tax funds—a 43%
discount! Moreover, although traditional deferred
compensation is taxable to the employee when
received, a smart tax attorney (is this description
redundant?) can help you receive your entire deferred
compensation amount tax-free. This is an esoteric yet
proven exit strategy that greatly amplifies the tax bene-
fit of an already powerful “discriminatory” retirement
plan. Lastly, for those who are near the cusp of the
income thresholds for the “specified services” limita-
tion to be phased out or eliminated ($157,500
single/$315,000 married), deferring income that, if
taken in the current year would make you ineligible for
the 20% QBI deduction, could have an enormous
impact.
Deferred Comp
Deferred compensation is simply an arrangement in
which a portion of an employee's income is not imme-
diately paid out after the income has been earned.
Instead, it is held by the company and the terms under
which it will be paid out are detailed in a written plan
between the company and the employee. Like salary,
deferred compensation payments (i.e., when they are
actually paid to the employee) are deductible to the C
Corp (i.e., no double taxation to the shareholder-em-
ployee) and not currently taxable to the employee.
Stated differently, the tax on the income is deferred to
the employee and the deduction is deferred to the
Corporation.
While the funds are deferred, they are invested by the C
Corp. Since investment earnings are taxed to the C
Corp, it is very common for the funds to be invested in
a cash value life insurance policy to neutralize the corro-
sive effect of current income tax on investment gains.
The insurance policy that serves as the investment
vehicle is typically structured with the minimum
contractual death benefit allowed by the IRS in order to
reduce the overhead cost of the policy and maximize the
potential for cash value growth.
Clearly, the best of times are here for those who under-
stand how to properly structure and integrate a C
Corporation into their tax and retirement planning.
about the author:
Christopher Hynes, JD, CFP ®
Attorney and Certified
Financial Planner
As one of approximately 1,800 attorneys who are also
Certified Financial Planners™, Chris Hynes’ education,
training and experience furnish him with a unique perspective
on complex financial structures, issues and products. Since
his admission to the Massachusetts Bar almost 20 years ago,
Chris has provided estate planning, insurance planning,
financial and tax counsel to hundreds of individuals, business-
es and non-profit entities. While serving as Senior Partner and
Director of Advanced Planning for an independent, 10-advisor
Massachusetts-based wealth management team, Chris quick-
ly earned a reputation among his peers as a financial innova-
tor in the insurance and fixed product arena.
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