Expert: Richard Fritzler - 11/2/2007

Question
100% of the My Mothers C-corporation's income is passive (rents) and she owns 100% of the stock. Will she be taxed at 50% rate on profit? And if so what is the best strategy for reducing taxes?

Answer
"If the corporation is receiving more than 60% of it's income from passive sources, such as rent, royalties, dividends and interest, and the 5 largest stockholders own 50% or more of the stock it would be deemed a Personal Holding Company."

Which is the rule you are asking about. The rates for a PHC are different than other Real Corporations. a Real corporation starts at 15% for the first $50,000 and goes up to 34% average once you exceed $335,000.

The PHC starts at 30% and goes to 49%, on the same scale. Effectively there is an additional 15% added to the rate.

We can create a corporation that would not be subject to that tax rate. It would require transferring the property and would not eliminate the problem of the past. That would be the ideal solution if we were starting from scratch; to design and execute a corporate structure to avoid the PHC designation. Then it would never be a problem.

From where you are right now . . . if I knew what amount of income we were dealing with, that would still be the best option, but there might be others that would work in a pinch. Give me a call.

Richard Fritzler
www.owelesstax.com
phone 800 590-6612