One of the most important things to ensure when financing capital purchases is that you use the right type of entity to structure the acquisition. Partnerships and S-Corporations are pass-through entities, so all the profits and losses flow directly to the owners. As a result, it’s the personal tax bracket of the individual owner that determines the post-tax financing costs or capital acquisitions.
Assume, for example, that you are in a top tax bracket at 37% and take a capital loan for $100k. Financing this debt through one of these pass-through entities means you’ll need to earn over $169k to pay off the debt as this nets out to around $100k after taxes.
On the other hand, if you had structured the same capital acquisition via a C-Corporation, you would only need to earn approximately $127k to have the same $100k after-tax available to pay off the debt, due to the 21% Corporate tax bracket.
The Tables Below Illustrate the Example:
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