Form a C-corporation for personal investing?

[Fermion]

Hi guys,

I have been toying around with tax scenarios and it looks like if we had $11,000 as additional earned income for 2017, we would have gotten back $1200 MORE in tax refund. Kind of wack but it stems from being able to max out two IRA and receive the saver's credit.

If we replaced $11,000 of our short term capital gains with that $11,000 in earned income, we would have over $3,400 MORE in tax refund (saver's credit + reducing ACA MAGI).

So this got me thinking about ways to generate earned income from investing and ways to reduce our MAGI from active short term trading.

Filing as trader status doesn't do it, even if you could qualify. It is not earned income.

Maybe creating a C corporation might do it. The corporation would pay tax on net profit and we would pay tax on distributions of that profit. If we did not have distributions though, then essentially there would be no double tax. What would be the benefit then? Well, the corporation could hire one or both of us to do the accounting, manage investments, create a web page, and write a monthly news letter. Our salary from the corporation would be earned income and we would pay SS tax on it but also be able to contribute to a IRA or maybe even some form of 401K plan. After deductions, the corporation would pay tax on net capital gains and reinvest the money left over, continuing the process.

It sounds very crazy I know and might not be worth the hassle, so right now is just a thought experiment. On the other hand, saving $3400 in tax (or more like $2000 or so after paying SS) plus being able to sock away money in a retirement account could be interesting.

Thoughts?

 

[cathy63]

After deductions, the corporation would pay tax on net capital gains

That right there is where you need to dig deeper. What rate is the corp paying on those LTCGs? In the past I think it was the ordinary corporate income tax rate, which is higher than your individual LTCG tax rate. I do not know if that has changed with the latest tax bill. If not, then the corp would be paying 21% on realized gains while you would most likely be paying 0% or 15% if you owned the gains.

I think you need to do tax returns for multiple different gain and loss scenarios for yourself and the corp using the 2018 tax rules before making a decision.

 

[Texas Proud]

Take this with a huge grain of salt as this is way in the back of my head and I could be totally off base....


I think there are separate rules when a C corp is used for investment purposes....

Just throwing this out.... will you have to file anything with the SEC? IOW, this is not a Sub S or LLC.... heck, why NOT create a Sub S or LLC and pay yourself for mgmt etc....

Last, might be considered a tax scheme and not allowed by IRS....

It will be interesting to see what others say....

 

[GrayHare]

The earned income is the problem. There's not only FICA but also unemployment insurance. Now that corporate tax rates have been reduced, my guess is you'll come out slightly ahead dollar wise via a C corp but you'll have much more paperwork to do, and if you screw up that paperwork the penalties are harsher.

 

[pjm-7]

Tread lightly, very lightly. If the IRS were to ever rule against you, the headaches will be way bigger than the few dollars that you would save in taxes. Won't even talk about if they go down the road of criminal penalties.

 

[brucethebroker]

Had a C corp for my self-employed income years ago. Grew tired of the extra layer of paperwork and extra costs for tax filing. Went back to sole prop.

I miss the extra layer of liability protection, but that is all.

 

[aja8888]

I had an S Corp for 13 years and did all the OP says can be done, and then some.