25 Jun 2014

An Overview of S-Corporations

The S-corporation is the most popular tax entity in the United States and the number of S-corps is increasing faster than any other type of entity. A for-profit, state-chartered corporation may elect S Corp status. Additionally, one option available to an LLC is the ability to elect to be taxed as an S-corp. Note that an LLC that elects this status is not a corporation and will not be treated as a corporation other than for tax purposes.

The increasing number of S-corps can be attributed to at least two major factors. First, the attributes of an S-corporation are attractive to entrepreneurs. Major advantages are that losses can be passed on to the shareholders and deducted on their individual returns. The S-corp provides limited liability protection and it is easier to raise capital as a corporation. Additionally, S-corp earnings are not subject to self-employment taxes, Read More

Written by John Stancil | Posted in Corporate • IRS

27 May 2014

Holding Canadian Vacation Properties In A US Entity Avoids Exposure To Canadian Taxes On Death

Many Americans hold interests in vacation or recreational properties in Canada. Often such properties are intended to be passed on from generation to generation.

Canada taxes U.S. residents on capital gains from the sale or other disposition of Canadian real estate, even if such real estate is held for recreational or vacation purposes.

Canada’s ability to tax U.S. residents on gains from the disposition of Canadian real estate is recognized in Article XIII(3) of the Canada-U.S. Tax Convention (“the Treaty”)

In addition, when a U.S. resident dies owning Canadian real estate, that individual will generally be deemed to have disposed of the property immediately before his or her death Read More

Written by Michael Atlas, CPA, CA | Posted in International • North America • Real Estate

22 May 2014

United States LLCs And Canadian Residents – A Bad Combination!

There is a big problem for Canadian residents who use U.S. LLCs- the Canada Revenue Agency (“CRA”) considers them to be corporations, even if they are considered disregarded entities (if only one shareholder) or partnerships (with two or more shareholders) for US tax purposes.

Furthermore, the CRA does not consider the LLC itself to be a resident of the US for the purposes of the Canada-U.S. Income Tax Convention (“the Treaty), since the LLC is not liable to tax (assuming it has not elected to be treated as a corporation under the US “check the box rules”).

In fact, in many cases, US LLCs that are controlled by Canadians will be considered Read More

Written by Michael Atlas, CPA, CA | Posted in Income Tax • International

26 Mar 2014

S Corp vs. LLC – Simple As Choosing Salt Or Pepper?

Someone said, “The 3 C’s of life were: CHOICES, CHANCES and CHANGES. One must make a choice to take a chance or one’s life will never change”. We are faced with choice in every thing we do, and making the right choices requires sound knowledge of the various options available to us.

When choosing an operating entity for a company, it is very important that we thoroughly research the options available. Your business can be a sole proprietorship, a partnership with someone else, a single member LLC, a pass-through entity like an S Corporation or it can be a C corporation. What I will layout in this blog today are the characteristics of an Limited Liability Company and an S Corporation; the pros and cons of choosing each entity type; and converting from one entity to another. Read More

Written by Manasa Nadig | Posted in Corporate

14 Jan 2013

Penny Taxwise Ponders Incorporation

We meet again, you tax-paying rascals! Penny here, and I’m back atcha with another installment of Penny Taxwise. As you loyal readers out there know, your ol’ pal Penny is rocking the whole work-at-home mom gig like crazy this year. At the end of 2012, my little freelance writing biz exploded and I’ve been struggling to catch up with the success.

To compound things further, I’ve branched out from the freelance writing to a variety of other endeavors – a blog, websites, and an upcoming info product line to be exact. I expect to earn a significant amount of income from these things over the next couple of years, and it dawned on me that I should think about taking the plunge and becoming an actual business.

Naturally, I’ve been researching the heck out of the idea this week. I was spurred by a question that was posted recently right here on TaxConnections:

Oh man. That’s my biggest fear realized. I try to do everything by the book, but I fear the wrath of Uncle Sam when it comes to incorrect self-employment tax records – I think all freelancers feel the same way. Patrick O’Hara, Tax Pro and Owner/Enrolled Agent of CHR Associates in New York, jumped at the chance to respond:

Well, wow. His reply was the final push over the edge I needed to finally make a real effort with my business structure search. Off I went to learn about business entities, and boy… did I learn a lot!

Why I’m Thinking LLC

Since Mr. Taxwise and I have our own property to protect, I want to form a legal structure for my business that will shelter us from any potential lawsuits against our personal assets down the road. If you’re wondering why I’m so worried about that with nothing but a teensy Internet biz to show for myself, allow me to enlighten you.

My ultimate goal is to eventually purchase rental properties. It’s something I’ve wanted to do for the better part of ten years, and my online adventures may just allow me to build up enough savings to break into the game. However, if I choose to file as a sole proprietor, my personal assets won’t be protected.

That’s why I decided to go for incorporation. I learned that there are three basic types of legal entities freelancers could form if they choose to incorporate: an S Corporation, a C Corporation, or an LLC (Limited Liability Company). Each comes with its own benefits and drawbacks for freelancers, so picking the right one is vital for protecting your bottom line.

According to an awesome SBA writeup I found, S Corporations, if owned by one single shareholder (the freelancer), allow only the earnings to be subject to employment tax. If the S Corp freelancer makes quite a bit one year, he or she can take a fraction of that year’s earnings as a paycheck and the rest as “profit through distribution to shareholders.”

The S Corp does have a major downside, of course. It demands yearly legal hoop-jumping, including accomplishing compelling tasks throughout the year – requirements such as holding regular shareholder meetings, filing minutes from them, extensive record-keeping, and reporting bylaw updates. Sounds like a blast, right?

On the other hand, a C Corporation is great for people who have small startups that may seek future venture capital to finance expansion. Although there’s flexibility to spread profits around to plan for taxes. However, at the end of the day, a freelancer who chooses this corporate structure will almost always end up with a hefty tax bill due to the whole double taxation thing. Not very fun, either.

That brings us to the newest corporation type around – the Limited Liability Company (LLC). Owners of LLC companies deal with taxes like sole proprietors. They’re taxed on the LLC’s net income, and those taxes are reported on the owner’s personal tax return. The LLC simply acts as a “pass-though entity.”

That was all fine with me since the biggest selling point was the part about an LLC protecting me from legal attacks once I begin dealing with real estate. Plus, if my company doesn’t make much or operates on a loss at first, I can report that on my income taxes. Bonus!

Yup, I’ve definitely made my choice.

Evaluating Your Own Biz

Enough about me… let’s talk about you! If you’re the proud owner of a small biz or a freelancer yourself, it’s important to evaluate your own business needs before choosing a structure. Moreover, you should talk to a tax professional before making any big decisions.

In addition, don’t forget to check with your state for laws concerning your new filing status. Many require different kinds of things from you depending upon the entity you choose.

That’s it for me this week, my taxalicious buddies!

Until next time.

Making Cents Count,

Penny