Election of to Structure the LLC Entity as C-Corp or PASS-THROUGH for Tax Treatment


Double Taxation Dividends


Conventional wisdom dictates that most companies should be carried out as pass-through entities because that avoided the dreaded double taxation problem affecting C corp.




For the entities under Act 20 C-Corp, the threat of double taxation does not exist in Puerto Rico, since the dividends and distributions have been attenuated at a tax rate of 0%.


Filing and Operating fees


Operating fees and filing requirements are the same in Puerto Rico for a C-Corp on April 15, and PASS-THROUGH on March 15 entity.  However, the filing date of the returns is different, for the corporation, it is the 15th day of the fourth month following the closing year, and for the Pass-Through entity, it is the 15th day of the third month following the closing year.


Displacement of income


The C-Corp can move the income from your personal tax return, thus allowing a lower adjusted gross income (AGI). The benefits of a lower AGI are that it can limit the gradual elimination of several deductions and credits.


Compensation and benefits


For C Corp, the compensation and benefits are tax deductible for the company and tax-free for the shareholder-employee. Some examples would be health insurance, medical plan or reimbursement plan for medical assistance, travel, education, and collective term life insurance.


C Corp can pay moderate market value salaries to shareholder-employees to minimize Social Security and Medicare taxes.


Payroll tax


The PASS-THROUGH could be affected by payroll taxes since all generate ordinary net income could be subject to payroll taxes. One of the main disadvantages is the tax on self-employment (SE) of 15.3 percent on the ordinary net income generated by the pass-thought entity. Ordinary income includes items such as sales of products or services, commissions, or short-term income in real estate if you are a real estate professional.


Personal responsibility


Another main disadvantage of pass-through is the personal responsibility of the owner for the tax obligations of the business. If you are exposed to taxable risks, you may want to consider C-Corp treatment, even if it is not necessary for any other reason.


Appreciation of Assets Holding


If the entity has mainly real estate, crypto, certain intangible assets, and other assets that are likely to be appreciated, it is generally not advisable to hold them through a C-Corp.


If the assets are eventually sold with substantial benefits, they may be subject to ordinary tax treatment if the entity under Law Act 20 does not include capital gains as a particular fiscal treatment element, most of them do not include such terms.


On the contrary, if you own mostly real estate, crypto, certain intangible assets, and other assets that are likely to be appreciated, these assets must be in the hands of an individual under Law ACT 22 or a pass-through entity owned by Act 22. The profits from the sale will be exempt, as a pass-through involves taxes at the owner level. Real estate gains are subject to taxes at their location; therefore, if they are in the US, then, they are subject to US taxes.


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