What happens when you invest within your Holding Company?

I wanted to make some explainer videos for business owners who invest within their Holding Companies and the significant tax consequences of doing so.

Let’s take a common scenario. A business has a good year; they pay their corporate tax and, on the advice of their accountant, transfer $100k to their Holding Company (Holdco). There are many reasons to that, but I won’t get into it here.

They decide to invest the money within their Holdco. Investments are considered passive income and are subject to the highest corporate tax rate (50.17%). So, for every dollar earned, you pay more than 50% in taxes. Let’s assume you get a decent average yield of 6%. Let’s say you have done this for ten years, so you’ve put $1 million into your Holdco and invested it at a rate of return of 6%, then left it there for 25 years. You still need to take it out of your Holdco. You decide you want to get that money out of the Holdco, where it’s subject to a further 47.4% qualified dividend tax.

That $1 million you’ve invested within your Holdco to get it into your hands personally is only worth $951,000 because of the tax.

In the next video, I will show you an alternative tax-exempt strategy that is much better.

Reproduced with permission from WEALTHinsurance.com

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