Q:

Subject: C and S corporations

Hello,

Thank you very much for the informative C vs. S Corporations comparison.  Two friends of mine and I are thinking of becoming a corporation (IT Consulting) and are in the process of deciding which type would be best for us.  Based on your article, it is apparent that you are more in favor of the C type because of its' flexibilities to be at a lower tax bracket.  I have an question which I hope you can shed some light on.  To be honest, mine and my friends' main interest of becoming a corporation is to write off the "expenses" from our "corporation" in our current W2s.  Because we are planning to continue our day-time employment, we want to minimize the taxable incomes on our W2s by write-off our "corporate expenses".  This is why we originally are leaning toward the LLC since we were told that it would allow us to deduct "corporate's expenses" on the W2.  We later found out that this would also be the case for S corporation status.  I would appreciate your feedback on our thinking process.

 

Kind Regards,

A:

 As I have to warn everybody, you should be working with a tax pro who can help you fine tune everything to fit your particular circumstances.

However, a couple of points in your email warrant further scrutiny.  It sounds as if your corp won't be generating any actual income, just expenses; and that you are going to continue to be a W-2 employee.  That has the inherent problem of whether your corp has an actual profit motive, which would be crucial in determining whether you would be entitled to deduct the pass-through losses from an S corp or LLC.  IRS frowns on the use of business entities just to generate paper losses.

What you may want to consider is to terminate your status as a W-2 employee and have our employer pay your new corp instead.  I have seen that technique save thousands of people huge amounts in taxes, including payroll taxes.  What is also possible is to do it both ways.  Some of your compensation is on W-2 and some through your corp.  There are various reasons to maintain some employee relationship, such as eligibility for the employer's benefit plans. 

If your corp generates income, my earlier conclusion that a C corp has less tax than an S will apply for all of the reasons that I spelled out in my article.  As I mentioned in there, in terms of what kinds of expenses can be deducted, the C corp allows much more, especially in the area of fringe benefits and the Section 179 expensing election.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

 

Thank you very much for your insightful feedback.  We will definitely look more into Section 179 expensing election.  Again, thank you for your time and have a great weekend.

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/06/2005 02:50:00 PM Send this post: