10/ 01/ 2008
by Barbara Weltman
Currently, the top tax rate on qualified dividends and most long-term capital gains is 15 percent. However, a new Congress and a new administration could raise the rates next year. Now may be a final opportunity for business owners to enjoy this low tax rate. Some possible strategies:
Sell your interest: For owners who have been thinking about selling some or all of their holdings in a company, whether it is a sole proprietorship, limited liability company, partnership or corporation, now may be a good time to act. Capital gains resulting from the sale will be taxed at the current low rate. Delaying action until next year could mean a higher tax burden on your profits.
Note: Don’t let tax considerations dictate your decision to sell; market factors and personal estate planning considerations should not be overlooked.
Pay dividends: If your business is a profitable C corporation, owners can receive dividends that will be taxed to them at the 15 percent rate. While the corporation cannot deduct dividend payouts, this strategy can still save the corporation and owners money. If the dividend amount had been paid to owners as compensation instead of dividends, such amount would be deductible by the corporation but taxed to the owner at his or her marginal rate on ordinary income (currently up to 35 percent); the amount is also subject to payroll taxes. This means both the corporation and owner would owe Social Security and Medicare (FICA) taxes on the payment. Even if the Social Security portion of the tax has already been met because an owner’s compensation--besides the additional payment--has topped the annual limit ($102,000 in 2008), there is still a 1.45 percent cost to both the corporation and owner. There is no cap on the Medicare portion.
Added benefit: Dividends reduce the corporation’s accumulated earnings, which are subject to a penalty tax if they exceed $250,000 ($150,000 for personal service corporations) and have not been accumulated to meet the reasonable needs of the business (such as expansion). The penalty rate on corporations is currently 15 percent, but could rise significantly higher if the top rate on dividends received by individuals is increased. Reducing accumulations via dividend payouts now can pay off in savings later.
