Dental Products Company Sinks Teeth Into Business

A Texas corporation engaged in the business distributing dental products requested that ITA provide tax assistance and advice. The company has three owners, one of them a 51% silent owner, a corporation, and the other, active in daily company activities, with 24 % and 25%. All owners were drawing large salaries which caused a net profit loss in the company.

Drawing excessively large salaries from a corporation that is reporting losses will likely result in the IRS reclassifying a portion of those salaries, construing them to be dividends. Since payments to employee/shareholders may be either compensation or a dividend, the IRS is able to reclassify payments in excess of reasonable compensation as dividends. The tax implications of such a reclassification are the monies are double taxed. Under current tax law, corporate earnings are taxed twice: first when earned by the corporation and a second time when distributed to the corporations individual shareholders in the form of dividends. ITA assisted the client in restructuring business operations to preclude the potentiality of any double taxation, thereby creating significant corporate and personal tax savings.

Being a Texas corporation, its business is subjected to Texas Franchise Tax. ITA assisted the client in restructuring business operations to reduce the income subject to Texas Franchise Tax by 99%.

ITA also examined the employee benefits program provided by the company, retirement options and its succession planning, which identified additional tax savings and enhanced employee benefits.

The first year tax savings for the business was more than $32,000 with a five year total savings of more than $160,000. The first year tax savings to our clients amounted to $21,797 and $18,672 with a five year total savings of more than $118,000 and $100,000. Estate planning recommendations reduced their combined potential estate tax by more than $450,000.

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