One corporation paying another, owned by same people

[cynnic]

What is the name of your state? California
I own a veterinary hospital. Many owners of veterinary hospitals pay themselves a commission based pay for their work as a veterinarian and an additional management fee for the business related work that they do. My hospital is an S corporation owned by my husband and myself. I wanted to start a second corporation to handle the management. I was going to have the hospital pay the second corporation a management fee. That fee would be a deductable expense for the hospital. That fee would be income for the second corporation but from that income we could deduct the expense of our home office thereby reducing the taxable income. I thought there might be other perks as well. My CPA doesnt know much about it but thinks it sounds illegal. I think it is perfectly legitimate, but I am not expert either. Im not trying to do anything illegal. But I do want to take advantage of whatever opportunities are available to reduce my taxable income. Any advice is appreciated.
Thanks

 

[clueless3]

My CPA doesnt know much about it but thinks it sounds illegal. I think it is perfectly legitimate, but I am not expert either. Im not trying to do anything illegal. But I do want to take advantage of whatever opportunities are available to reduce my taxable income.

This is perfectly legal; in fact, many corps do it that way. HOWEVER,

1) the 2-corp setup may not "reduce your taxable income" but may turn out to be TAX-NEUTRAL. You can work all the numbers out EXHAUSTIVELY; in many cases you won't save much in taxes (if any) YET you have to incur ADDITIONAL expenses of having a 2nd corp. Believe me, this scheme has been around for a long time; it's not new.

2) if the 2nd corp is located OUT-OF-STATE, your home state may look down on it as a way for you to "UPSTREAM" your income to avoid home-state income tax. Many states, like CA, are getting more aggressive in pursuing this kind of setup. It'd be fine IF the "income" that the out-of-state 2nd corp receives will not get distributed back to the owners in any way; however, when the owners start to benefit from that income, then the home state will collect its income tax.

In my opinion, having one S-Corp is sufficient to deduct all kinds of expenses already, including your home office if you use it for your business. I can't see why you need the 2nd corp to deduct any additional expenses.

If the 1st corp is a C-Corp, then you can try to maximize the expenses so that its taxable income is $50k or less, in which case it would be in the lowest tax bracket. This does not apply to the S-Corp since it's not taxed at the corp level.