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Tax Diagnostic Results in $300,000 in First Year Savings

01.01.16

Situation

A professional services corporation was unhappy with their current CPA, especially with the IRS examination currently in progress. The owners were paying tax at the highest corporation tax rates and at the highest individual rates, and were experiencing “double taxation” issues. On their personal tax returns, we found one owner had non-utilized loss carry forwards from a rental property leased to the corporation, resulting in temporarily “wasted deductions”.

How We Helped

First, we looked at the pros and cons of different entity types. We determined that by changing to an S Corporation, the client would immediately remove the corporate taxes at over 45%, and immediately remove the “double taxation” issues. Secondly, we consulted with a commercial real estate leasing agent to determine fair market rent for the commercial building that was leased to the corporation. We determined that a rent increase was necessary to bring the rent paid up to market rates. The corporation had the benefit of additional rent deductions that were supported by an independent study, and the owner was receiving additional rental income which was sheltered by loss carry forwards, making it the equivalent of tax-free income.

Results

The client saved over $300,000 in the first year alone. The removal of the double taxation problem by making the S corporation conversion is a permanent, annual tax savings. The tax savings from the change in the rental income will last for five years, which is the time it will take for the loss carry forwards to be fully utilized.