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How to Extract Cash From Your Corporation

August 29, 2012  |  cash corporation benefits dividend loan tax property
Larry F. Warner Jr CPA - Stephenson & Warner Inc.,

Who doesn’t love cash?  We all need and want it.  Business owners/shareholders often struggle as to when and how to best pull money out of their corporation for personal needs.  While we can’t always help with the “when”, we can definitely help with the “how”.  Below are some ideas.

1)  If you previously loaned money to your corporation and properly documented that loan with a formal note, repay yourself with interest per IRS rates.  The corporation receives a deduction for the interest and you do not have to recognize taxable income on the debt repayment, just the interest you receive.

2)  Give yourself a bonus.  Who is more deserving than you?  Please consult with us for the proper taxes to be withheld.  The bonus of course reduces the taxable income of the corporation and is taxable to you.  Be careful of paying too high of a bonus because it could be considered excessive and/or put you in a higher tax bracket.

3)  Borrow from your corporation.  Once again this needs to be a formal note with adequate repayment terms and interest
rates.  Rates are at historical lows at this time.

4)  While not cash, fringe benefits are almost as good. Many fringe benefits can be received tax free such as certain medical
benefits, life insurance, disability insurance, dependent care benefits, etc.  These benefits have to be non-discriminatory
amongst all employees.

5)  Sell property to your corporation for its fair market value.  Be careful not to sell the property for a loss since it will not be deductible by you. Also do not inflate the sales price of property you previously depreciated since the gain will be taxable to you as ordinary income.  There are other considerations to take into account before executing this type of transaction
so please consult with us before undertaking this.  

6)  Pay a dividend if the corporation has earnings and profits from prior years.  We haven’t always recommended this because
the corporation does not receive a deduction for paying a dividend.  However, with the tax rates set to go from 15% to perhaps 35%next year, it’s a good time to extract cash in this manner before rates go up.

As you can see, there are ways to pull cash or benefits out of your corporation without creating a huge
tax burden for yourself or your corporation.  Please give us a call to verify the method you are contemplating is the
best for your situation.