Bob Fraser shows how high-income earners can cut their effective tax rate to 21% by converting a profitable business into a C corporation and donating shares to a donor-advised fund. The strategy works because the personal tax system splits income into three separate buckets, preventing losses in one from offsetting gains in another. A C corp consolidates everything into one bucket, eliminating those restrictions.
I realized by doing some analysis of my tax situation that I was paying a lot of taxes. And so a few years back, they changed the laws where corporations are taxed at 21%. And I was paying far more than that. So I put one of my main moneymakers businesses into a C corporation. And I also donated a certain amount of the shares there to a donor advised fund. So I got a big tax deduction. And so that business is partly owned by charity, but I also, I'm only paying 21% taxes. If you're paying a lot more than 21% taxes, you might consider this. So C corporation. So, you know, with personal, you have 3 major tax buckets. You've got ordinary or earned income, you've got passive income, you've got portfolio income. And if you have losses in portfolio, you cannot use those losses to offset active gains. If you have losses in your active business, you have a net operating loss, you can't use that against portfolio gains. And what that does, it creates a lot of inefficiency in the tax code or efficiency from the government's perspective. Right. So that people are going to pay taxes no matter what, even if they have a lot of freaking losses. In a corporation, there's one bucket. So you need to do an analysis of are you generating losses that you can't use and are you consistently generating losses that you can't use in your tax situation? You should consider going into a C corporation.
