Your business may have reached the point of such success that you want to start taking more money out of it. The owner of a business operating as a corporation can simply have the company declare a dividend, which would be payable to the owner and any other shareholders. However, this choice bears a heavy tax cost. The company will have already been taxed on the earnings used to pay the dividend, and you will be taxed on its receipt. Fortunately, there are other ways of taking money out of a business at a much lower tax cost.

Some steps can be taken to produce immediate tax savings. Other efforts will reduce taxes down the road. Also, there may be opportunities to get business funds in the hands of family members at a lower tax cost than would result if the funds were paid directly to the owner.

Maximum savings per dollar can be realized when the business makes expenditures that benefit the owner, are deductible by the business and are not taxable to the owner. Lesser but still good savings can be realized for business expenditures that benefit the owner, are deductible by the company and are either taxed in a favorable manner to the owner or are tax-deferred. Some items that the business may legitimately deduct may be only partially taxable to the owner or may not be subject to social security taxes. Many valuable fringe benefits fall into these categories and can produce substantial savings.

Even distributions or expenditures that are fully taxable to the owner may be better than dividends, if the company can deduct them. For example, a dividend paid by a C corporation is not deductible by it and is taxable to the shareholder. If that same amount could properly be paid out to the shareholder as compensation, it would still be taxable to the shareholder but at least the company would get a deduction.

Similarly, distributions that are not deductible by the company but that are taxable to the owner as capital gain usually are preferable to nondeductible distributions that are taxable to the owner as ordinary income.

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