planning bussines

A regular C corporation that retains earnings and profits of more than $ 250,000 ($ 150,000 for a personal service corporation) instead of paying dividends to shareholders may have to pay a 38.6% penalty tax in 2002. Such a company can try to avoid the penalty by explaining in it's corporate minutes the reasonable business requirements for the retained earnings. A family owned company may be able to retain excess earnings - and avoid the accumulated earnings tax - if the earnings are being held for possible redemptions of dissenting minority shareholder's restricted stock. C corporation shareholder employees often prefer to withdraw corporate earnings in the form of tax deductible salary and bonuses instead of nondeductible dividends. However, a company can deduct only reasonable amounts of compensation. Whether a certain compensation is reasonable depends on several factors, including the employee's role in the company and how the employee's salary compares to those paid by similar companies for similar services. Leasing business property or equipment to your corporation is another way to draw out earnings on a tax deductible basis. Your corporation can deduct the rent expense; you declare the rent as income. Here too, amounts charged for rent should be reasonable.