1Retained EarningsRescueCWPP™ EducationalCopyright 2006The Wealth Preservation Institute378 River Run Dr.St. Joseph, MI 49085269-408-1841[email protected]
2What are “Retained Earnings”•Retained earnings are created when a company (C-Corp.) decides not to spend or distribute income at the end of the year.•The company “retains” that income for future uses.•The Job of Retained EarningsIn broad terms, capital retained is used to maintain existing operations or to increase sales and profits by growingthe business.
3Taxes•In order for a c-corporation to retain earnings it must pay corporate income taxes on the money retained.•Corporate Income Tax Rates--2005•Taxable income over Not over Tax rate•$ 0 -$ 50,000 15% •50,000 - 75,000 25% •75,000 -100,000 34% •100,000 - 335,000 39% •335,000 -10,000,000 34% •10,000,000 -15,000,000 35% •15,000,000 - 18,333,333 38% 18,333,333 ..........35%
4Classic double tax•Retained earnings creates the classic “double tax.”•The owner of the c-corp doesn’t end up using the money to grow the business and then must get it out of the company at some point.• How?– Taking it home as income (usually in the 35-45%) personal income tax bracket.•The corp. paid upwards of 39% corp. tax and then the owners pay upwards of 45%.•This is very painful.
5So why did we retain earnings?•Many times a smaller c-corp is talked into retaining earnings by their CPA.•Many times that retained earnings will never be used and the client becomes upset when they learn of the double tax.•There are few solutions to this double tax.
6Preferred/Non-Preferred LLC Solution•If the clients could figure out a way to get the retained earnings out of the company with a cost of 15 cents on the dollar would they be interested?