(Tax Year 2020): Can my own DBA charge a referral fee to my own corporation so that I can align overall tax liability in more favorable way to my current situation.

[Sam-Vishwas]

This question is for 2020 Tax Year: Since late 2019 I had a DBA with active income. In 2020 I created a California Corporation (owned by myself) and transferred my 2020 DBA business to it. Can my DBA charge a referral fee to my corporation? Can this payment be made now? If so, then it will help me in managing my tax liability efficiently.

[Mike9241]

This question is for 2020 Tax Year: Since late 2019 I had a DBA with active income. In 2020 I created a California Corporation (owned by myself) and transferred my 2020 DBA business to it. Can my DBA charge a referral fee to my corporation? Can this payment be made now? If so, then it will help me in managing my tax liability efficiently.

how is the corporation taxed for income tax purposes S-corp or C-Corp? not that it matters for 2020 but it may matter for future tax planning. if the DBA is owned by the corporation the tax effect would be zero since the corporation would have a deduction for the referral fee and it would also have an equal amount of income from receiving the referral fee. so I don't understand how you would in any way affect your tax liability.  if what you are trying to do is have 2020 Schedule C income while the Corp has a deduction it's too late to do this for 2020 since we are in 2021.  there are tax laws governing related party transactions which is what this would be.  then there is the possible tax issue of the Corp having to pay you a 2020 W-2 salary which is not possible if it wasn't done in 2020.   Moving money from your right pocket to your left pocket doesn't save you any taxes. perhaps consult a tax pro before the end of 2021 so they can advise you on tax planning opportunities.

[Sam-Vishwas]

I made a mistake in my original post. I totally forgot to mention that the DBA is a sole proprietary company and not owned by the corporation.

[Critter-3]

So can the sole prop business pay the Corp (also owned by you)  for a service to reduce the SE taxes on the personal return ???   

Yes it can however there must be a legitimate service performed otherwise the IRS could take the position that you are committing income tax fraud by reducing SE taxes  artificially by "hiding" profits in another entity.  

Now the Corp ... if it provides a service are they paying an employee to do the work ???   If not how did the service get completed?   If they do pay an employee wages to do the service your Sch C paid for then what did you actually gain in the end especially if you are the only employee ?  

[Opus 17]

I don’t know the details of the related party laws that Mike was talking about, but I have some thoughts you should consider.

You want to transfer money from the corporation to the sole proprietorship by having the sole proprietorship charge a referral fee to the corporation.  The first thing I would say, is that your corporation can pay ordinary and necessary business expenses. You can’t just move money around for convenience. If the sole proprietorship provided something of value to the corporation that you would pay the same price to another business, that sounds like a legitimate expense.  For example, if you want the corporation to pay the sole proprietorship for its customer list, how much would you pay the unrelated business for the same customer list?

Second, I don’t know why you would want to do this. The income taxes on the sole proprietorship are at least the same as the income tax on the corporate income.  Remember that if you materially participate in running the corporation or providing services to the corporation, the corporation must pay you a fair market salary on a W-2, and pay all the related employment taxes, unemployment insurance, and so on. After you have been paid a fair market wage on a W-2, you may be able to withdraw additional profits at a lower tax rate, but you must pay yourself a fair wage first.  If this transfer of funds results in the corporation having a loss, you may still have to pay yourself on a W-2 for running the corporation, in which case you will have paid double taxes on the same money, the profits in the sole proprietorship and the fair market wage for running the corporation.

And of course, if you have not issued yourself a W-2 yet for the corporation, you are quite late and may have compliance problems with the IRS. Your corporate tax return was due March 15, 2021, unless you had an approved extension.

The bottom line is, you can’t simply move money around for convenience, or to “align“ your tax positions. You must have a legitimate business reason for doing so.

[tagteam]

@Sam-Vishwas 

The bottom line is simply this:

Since a sole proprietorship is legally indistinct from its owner, a corporation (C or S) cannot own a sole proprietorship (it would be as if the corporation "owned" the individual and the fact that the individual does business under an assumed name is largely irrelevant).

Of course, you can transfer assets (tangible and intangible) you own to the corporation, but that is a different matter and, regardless, you should absolutely seek professional tax guidance for this matter.

EDIT: You did not mention whether or not you made an S corporation election by filing Form 2553 (see link below), @Sam-Vishwas, which is yet another variable and reason to consult, in person, with a tax professional.

https://www.irs.gov/instructions/i2553#idm139855003386720