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The Price of Reinvesting

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I've recuperated from the presidential race. A lot happened between my last post and election day that made my decision much easier.

During that time, my last post also inspired a debate -- heated at times -- in the comments section. And because of the questions it generated, I feel the need to elaborate on something I said about leaving money in the company and having to pay taxes on it.

That point is right out of the tax code and any knowledgeable CPA will verify this. If you are a C Corp, you pay personal income tax on the money you pay yourself, and any remaining profits are taxed at the corporate tax rate (which could be more or less depending on that year's tax code). If you file as an S Corp, all of the income of the company flows to you personally and you pay personal taxes on it.

The reason that many people do this, including myself, is to avoid the double taxation that occurs when you sell your company. If you are a C Corp and you sell your company, you will pay taxes on that money -- again. Mr. Krubner asked about income taxes paid on money reinvested in the company. Just because a person "reinvests" money in the company, it does not mean that they don't have to pay taxes. Profit is profit. Whether you pull all of it out, whether you pull some of it out, it's profit and you are supposed to pay taxes on it.

If this doesn't make sense to you, please talk to an accountant. I have always enjoyed an advantage in this part of my business, since I have an accounting degree.

Thanks for all your input.

Last updated: Jan 12, 2009




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