Question most CPAs as to what business form they suggest for the business clients and they typically answer, “A C Corporation—at least in the early capital formation years of the business.” Ask any Investment Banker or other Transaction Advisor what entity they prefer and you will likely hear, “An S Corporation or LLC (Limited Liability Company), or perhaps a partnership or sole proprietorship. Anything, anything, but a C Corporation!”
The Protecting Americans from Tax Hikes Act (PATH) contains a number of tax provisions that are designed to reduce the amount of taxes paid by United States taxpayers. This act was signed by the President in December 2015. The provisions in the act are not new incentives, but made existing incentives permanent. This can be seen as somewhat significant as there is sentiment in Congress and elsewhere to reduce the tax benefit from charitable contributions. I would add that “permanent” in tax lingo means the provisions do not expire, but may be changed at any time by Congress.
Congress recently passed some legislation that changes the due dates of certain returns. Partnership and S Corporation returns using a calendar year will be due on March 15 (two and one-half months after the end of the fiscal year). This is effective for tax years beginning after December 15, 2015.
C Corporation returns using a calendar year will be due will be due April 15 (three and one-half months after the end of the fiscal year). This is effective for tax years beginning after December 15, 2015 unless the fiscal year ends June 30, in which case it is effective for tax years beginning after December 31, 2025. Go figure.
The new law also changes the due date for the FinCEN Report 114 to April 15. Remember Read More
What should small business owners focus on for 2015 tax planning?
An important, yet often overlooked, issue for small business owners is the choice of the form of entity under which they operate. For 2015, this will become critical as Congress contemplates major changes to the tax code. Currently, the maximum corporate federal tax rate is generally less than the maximum individual tax rate. This has led many business owners to consider converting their sole proprietorships and pass through entities (such as S corporations and LLCs) into C corporations, which are taxed at the lower corporate rate. Caution must be exercised before making this change, Read More
Back to my friends that I previously wrote about who misunderstood passive activity and material participation. They are a married couple filing jointly and own a very successful business together structured as an S-corporation as well as a portfolio of rental real estate properties. They actually consider themselves privileged to have their their tax woes shared anonymously via this tax blog which is helpful as I appreciate any opportunity to share how real life scenarios are applied to the US internal revenue code.
One of the properties my friends own – titled in their personally names jointly – has as a tenant an S-Corporation in which they each also own 50% of the shares issued and outstanding. Basically they hold title to the rental property – a large office warehouse complex – and they own the corporation that rents the property. Unfortunately this rental Read More
New business owners often ask, “How do I set up my business For Tax Purposes?” One of the choices you make when starting a business is the type of legal organization you select. This decision can affect how much you pay in taxes, the amount of bookkeeping and paperwork required, the personal liability you might be responsibility for, and your ability of borrow money.
For-profit businesses fall under one of four structures for tax purposes:
1. Sole Proprietor – An individual who owns an unincorporated business by themselves. Most small and home based businesses are sole proprietorships. For tax purposes, the business activity of a sole proprietor is reported on Schedule C of Form 1040. This is Read More
Part I of this blog post detailed the requirements for eligibility for electing S corporation status, maintaining it, as well as the tax benefits of being an S corporation. It also outlined how S corporation status can be lost. The possible loss of S corporation status becomes very tricky when a foreign shareholder is involved, since nonresident aliens are not permitted to be shareholders in an S corporation. If a foreign national is a shareholder and is a US “resident” for income tax purposes, then S corporation status is fine, but it must be remembered that the other shareholders do not have control over the individual’s maintenance of his US “resident” status.
Steps to prevent the inadvertent termination of S corporation status should be undertaken Read More
Often, a small business or start-up will utilize an S corporation election for their business. An S corporation is a corporation formed under a particular State’s incorporation laws (or an organization that has elected to be treated as a corporation for US income tax purposes). The corporation must be eligible to elect S corporation status and its shareholders must consent in writing on Form 2553 to have the corporation elect S corporation status. The Form 2553 must be filed with the Internal Revenue Service (IRS) on or before the 15th day of the 3rd month of the corporation’s tax year in order for the election to be effective as of the beginning of that tax year. If the corporation is on a calendar tax year, the Form 2553 must be filed on or before March 15th in order for the election to be effective for that tax year. Read More
Owners of an S Corporation needs to carefully monitor distributions to shareholders to be certain that there are no disproportionate distributions. Failure to make distributions in proportion to ownership interests can void the S Corporation election.
Distributions to shareholders must be made in proportion to the ownership interests of the shareholders or a disproportionate distribution has occurred. For example, if an S Corporation has three shareholders owning 50%, 35% and 15% of the corporate stock, all distributions to shareholders should be in this ratio. These are distributions of profits, if the shareholders are also employees, amounts paid to them in salary are not distributions for this purpose. Read More
A major issue for most S corporations is the matter of shareholder compensation and benefits. One of the advantages of an S corporation is the ability to avoid self-employment taxes on the earnings of the corporation. However, payroll taxes cannot be totally avoided as the IRS requires that an employee/shareholder be paid a “reasonable” salary. A related issue is benefits made available to the shareholder/employee. There are restrictions on benefits that shareholders can receive. These shareholders often do not realize (or choose to ignore) that the corporation cannot be treated like a gift bag in which you reach in and give themselves personal benefits.
A shareholder/employee is required by law to receive a “reasonable” salary from the corporation. The IRS does not define reasonable but takes into consideration several Read More
When a business operates as a sole proprietorship or as a partnership, there are few legal and tax regulations that must be followed. However, if that business converts to a corporation, a number of things change and the owner(s) must adhere to these new expectations or run the risk of having the corporate form of organization legally disregarded. When a corporation is legally disregarded, the law treats it as though it does not exist. In a worst-case scenario, this means that the limited liability protection provided by a corporation is lost, and the owners can be held liable for the debts and acts of the corporation.
Keep in mind that a corporation, whether an S corporation or a C corporation, is a legal entity separate and distinct from its owners. This is unlike the situation with a Read More
Knowing one’s cost basis in an S Corporation is a vital issue for most owners of S corporations. However, to many such shareholders, basis is not understood and not known. Part of the confusion arises from the fact that S Corporations, LLC’s, and partnerships face two different basis numbers – inside basis and outside basis. Both are important, but the outside basis is more likely to become an issue annually for the shareholder. Shareholders may not deduct losses from the corporation in excess of their outside basis.
Inside basis is basically the balance in the owner’s capital account. It is the ownership interest in the corporation, but not necessarily what that ownership interest cost. Inside basis is maintained on the corporate books. It represents: Read More
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