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Tag Archive for S-Corporation

11 Feb 2020
Written by | Posted in Reasonable Compensation • S Corporation

What If An S Corp Owner Cannot Afford To Pay Reasonable Compensation?

S Corp and Reasonable Compensation - Paul Hamann

This is by far the number one question we receive, and the answer is both simple and complex. Why? Because the amount of Reasonable Compensation actually paid is tied to distributions, not profit or loss.

Depending on the company’s financial condition and business strategy, a shareholder-employee may be able to take Reasonable Compensation plus a distribution, just Reasonable Compensation, or neither. What the shareholder-employee can’t do take a distribution instead of Reasonable Compensation.

To help you better understand, let’s run through a few simple scenarios and then move onto some more advanced ones. Keep in mind the following:

Reasonable Compensation is defined by the IRS as: “The value that would ordinarily be paid for like services by like enterprises under like circumstances.” or the hypothetical “Replacement Cost” of the shareholder-employee.
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12 Nov 2019
Written by | Posted in C-Corp • S-Corp

Should A Loan-Out Be A “C” Corporation Or An “S” Corporation?

Mitchell Miller
Although many people in the entertainment industry have formed or converted their loan-outs to S corporations, the Tax Cuts and Jobs Act of 2017 (TCJA) changed some of the tax rules that affect these corporations (and their owners!).

Let’s see how these changes affect the choice of what entity to use when forming a loan-out corporation:

● Using an S corporation (S corp) loan-out may cost you most of your deductions.

S corps are required (and have been for many years) to pass out employee business expenses to their shareholders, and not to deduct such expenses at the corporate level. That means that expenses such as the fees for agents, managers, lawyers, and business managers are not deductible by the corporation. Instead these fees are supposed to be only deductible by you, the shareholder, on your individual return, as miscellaneous itemized deductions on your Schedule A. But, under the TCJA changes, miscellaneous itemized deductions are no longer deductible (at all!). In other words, you will now be taxed on all your income and get none of your deductions.

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23 Aug 2018
Written by | Posted in S-Corp • William Rogers

S Corporation Business Structures Many Considerations

William Rogers - S Corporations

The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible – and, with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were.

Tax Comparison

The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns and the shareholders pay tax at their individual income tax rates.

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19 Jul 2018
Written by | Posted in 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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25 May 2018
Written by | Posted in C-Corp • Individual • LLC • Partnerships • S-Corp • Sole Proprietorship

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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24 May 2018
Written by | Posted in C-Corp • S-Corp

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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24 Apr 2018
Written by | Posted in TaxConnections

Do You Want To Be An S Corp?

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S corporation status, the corporation must meet the following requirements:

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19 Apr 2018
Written by | Posted in LLC • S-Corp

When Is It Time To Become A S Corporation?

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

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02 Mar 2018
Written by | Posted in IRS • S-Corp

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

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

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07 Feb 2018
Written by | Posted in C-Corp • S-Corp

S Corporation Vs. C Corporation 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%. Read more

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08 Jan 2018
Written by | Posted in Corporate • TaxConnections

Corporate Separations Under §355.

In any successful family business there will likely come a time when descendants will want to take over the business from the older generation of owners. Usually, this will require that entities will need to be split into different business entities to accommodate both differences between the descendants (perhaps the descendants can’t cooperate with each other) or managing risk, so that high risk business can be separated from lower risk businesses and investments (construction business needs to be separated from investment assets such as stocks, bonds, annuity assets).

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16 Nov 2016
Written by | Posted in Corporate • Exit Tax

Choosing Between A ‘C’ OR ‘S’ Corporation – Selling Options For your Business

Ron Oddo

Usually, no other factors carry the weight of the tax issue or significantly differentiate the C from the S Corporation. Limited liability is attainable in both the C and S Corporation forms. Voting rights need not differ. An S Corporation conducts business, on a day-to-day basis, exactly as a regular corporation. The only difference between the C and S Corporation is the filing of a one-page IRS form (Form 2553) electing treatment as an S Corporation.

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