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Archive for S-Corp

S Corporation: What Is Reasonable Compensation For Employees?

S- Corporation: What Is Reasonable Compensation?

When computing compensation for employees and shareholders, S corporations may run into a variety of issues. The information below from the IRS may help to clarify some of these concerns.

Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes.

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Domestic Partnerships, S Corporations, Passthrough Entities Are Required To Report Information To Partners, Shareholders, or Beneficiaries

In general, section 965 of the Code requires United States shareholders, as defined under section 951(b) of the Code, to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Very generally, section 965 of the Code allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit applies to the inclusion under section 965(g) of the Code. Taxpayers, pursuant to section 965(h) of the Code, may elect to pay the transition tax in installments over an eight-year period. Generally, a specified foreign corporation means either a controlled foreign corporation, as defined under section 957 of the Code (“CFC”), or a foreign corporation (other than a passive foreign investment company, as defined under section 1297 of the Code, that is not also a CFC) that has a United States shareholder that is a domestic corporation.

According to IRC Section 965 domestic partnerships, s – corporations, passthrough entities are required to report information to partners, shareholders and/or beneficiaries in connection with the code. A domestic partnership, S corporation, pass-through entities or other passthrough entity should attach a statement to its Schedule K-1s, if applicable, that includes the following information for each deferred foreign income corporation for which such passthrough entity has a section 965(a) inclusion amount:

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Tax Professionals – Question Of The Week For You!

Tax Advisor’s – What Are Your Thoughts On This Question Of The Week?

My client has an 1120-F entity and wishes to convert it to a C-Corp or S-Corp. Is there a way to do this without any tax implications? He is a US citizen and the corp has two buildings that generate rental income.

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What Entities Qualify For The New Section 199A Business Write-off?

In 2018, a new tax write-off has been created for qualifying businesses – the Section 199A Business Deduction.

This deduction equates to 20% of Qualified Business Income assuming you meet income and salary limitations.  Also, shareholder reasonable compensation, interest, dividends and capital gains and losses don’t qualify. But if you meet these requirements, exactly what entities and businesses have Qualified Business Income?  Based on my research, here are the qualifying businesses:

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S Corporations vs. C Corporations In 2018

Many of you are wondering how the new tax rate changes will impact you. Obviously, we can’t answer that off the top of our heads as each person’s situation is different, and in many cases, experts are still trying to figure out how the changes will play out. One of the biggest changes is the corporate tax rate reduction to a maximum of 21% versus the maximum tax rate for individuals being around 37%.

The new tax legislation becomes effective January 1. That means many business owners are now considering whether to reorganize themselves as C corps.

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When Is It Time To Become A S Corporation?

Paul Mueller, Tax Advisor, Tax Blog, Loveland, Colorado, USA, TaxConnections,

For most new businesses and business owners, keeping it simple is key. After all, launching a new business requires attention to detail and doing many things right.  For that reason, most new businesses start out simply as a sole proprietorship or a Limited Liability Company (LLC).  As a successful business matures, however, the savvy owner should call time out to consider the S Corporation form of business.

The owners of an active business operating as a S Corporation enjoy a distinct tax advantage over other types of tax entities, particularly sole proprietors, partnerships and LLCs.  For the owner of a profitable sole proprietorship, partnership or LLC, the earnings are subject to both income tax and the 15.3% self-employment (SE) tax, which funds Social Security benefits and the Medicare health system.  This SE tax is often unanticipated, particularly for new entrepreneurs, and can cause havoc with cash flow at tax time. Read more

IRS Notice States Taxpayers Will Not Be Able To Circumvent Three-Year Rule Using S Corporations

Thomas Kerester, Tax Ambassador, Tax Blog, Washington D.C., USA, TaxConnections

WASHINGTON — The Internal Revenue Service announced today that S corporations are subject to the extended three year holding period for applicable partnership interests and that regulations will be issued soon.

Carried interests are ownership interests in a partnership that share in the partnership’s net profits.  Carried interests often are issued to investment managers in connection with the investment manager’s services.  These interests often result in the holder receiving capital gains which are taxed at a lower rate, rather than ordinary income. Read more

S Corporation Vs. C Corporation In 2018

Lisa Nason, Tax Advisor, Tax Blog, Greenville, SC, TaxConnections

Many of you are wondering how the new tax rate changes will impact you. Obviously we can’t answer that off the top of our heads as each person’s situation is different, and in many cases experts are still trying to figure out how the changes will play out. One of the biggest changes is the corporate tax rate reduction to a maximum of 21% versus the maximum tax rate for individuals being around 37%. Read more

When To Switch From LLC To S Corp

Many US entrepreneurs set up an LLC in the beginning, because it is straightforward and not too expensive. Generally, this is a good approach for the start as LLCs offer liability protection and other advantages. However, entrepreneurs are often not aware that with increasing income, switching from LLC to S Corp makes financial sense.

Why you should consider switching from LLC to S Corp

As your income from your LLC increases, so does the self-employment tax. You earn more, you pay more tax, but your ability to contribute to retirement accounts does not change. This is where converting the LLC to S Corp has advantages. Read more

CRA Forms T1134 and T1135 Often Missed by Canadian U.S. Real Estate Investors

The T1134 and T1135 are a sample of Canadian foreign information returns like the U.S. 8938, 5471 or 8865.

A number of Canadians are investing in the U.S. real estate market with a U.S. limited partnership whose limited partners are solely Canadian residents and the general partner is a U.S. C corporation whose shareholders are also Canadian residents.

For those who want limited liability protection, this type of Read more

September 2015 Business Tax Due Dates

September 15 –  Corporations

File a 2014 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.

September 15 – S Corporations

File a 2014 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension.

September 15 – Corporations Read more

Partnership, S-Corp and Trust Extensions End September 15

If you have a calendar year 2014 partnership, S-corporation, or trust return on extension, don’t forget the extension for filing those returns ends on September 15, 2015.

Pass-through entities such as Partnerships, S-corporations, and fiduciaries (trusts, estates) pass their income, deductions, credits, etc., through to their investors, partners, or beneficiaries, who in turn report the various items on their individual tax returns. Partnerships file Form 1065, S-corps file Form 1120-S, and Fiduciaries file Form 1041, with each partner, shareholder, or beneficiary receiving a Schedule K-1 from the entity that shows their share of the reportable items.

If all of the aforementioned entities could obtain an automatic extension to file their returns Read more

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