I’ve been teaching myself how to improve the vidcasts, and here is the first one with the semi-new style.  The built-in hyper-link to my article on corp fiscal years doesn’t seem to be working, so here it is.

Labels: corp, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/03/2010 09:52:00 PM Send this post:

If the future plans for a business include taking it public or bringing in venture capitalist funding, those will materially affect the most appropriate entity to use, usually ruling out an S corp, as I discuss in this vidcast.

Labels: corp, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/11/2009 07:19:00 PM Send this post:

Using multiple entities for tax, liability, and other business reasons has been a very common and useful strategy for longer than I’ve been in this business.  Why many tax pros are unaware or unwilling to recommend them is still surprising to me.

YouTube page

Labels: 179, corp, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/22/2009 03:08:00 PM Send this post:

Q:

 Subject:  Tax issues-c corp

 Hi, thanks for the awesome website!  Lots of useful info.  However, I was wondering if you could clarify for me how the shifting of money between fiscal years works.  Why does it have to be at the end of the year?  How can I legitimately transfer funds to the corp and deduct them from my personal income?  Is the repayment in January and the paying of money from the corp in June or whenever two separate transactions?  Just trying to decide on the right business structure for the lowest amount of taxes on our precast concrete company.

thanks a lot!

A:

The income shifting is normally an ongoing process throughout the year based on what the businesses can afford.    However, it is also critical to have your professional tax advisor take a glance at how the net taxable income is looking about a month or so before the end of the entity's tax year just in case there is a need to shift a lot more income than normal before year-end to get the income down to a reasonable tax bracket.

I have also been seeing some clients who have been shifting too much income during the year, creating a large negative taxable income; so that we need to make an adjustment in the opposite direction before the end of the tax year.

As I constantly warn. this kinds of strategy to shift income between entities is not overly complicated to do; but should not be attempted without the assistance of a professional tax advisor who understands the benefits of this.  Too many people simply look at their company's bank balance as an indicator of their current level of net income; while an experienced tax pro knows that the actual taxable income figure will often be very different from the bank balance.

If your current professional tax advisor is one of those who believe that intentionally shifting income between entities is too much hassle to even think about doing, it's time to switch to another tax pro who is not as lazy and is more concerned about helping you hold onto your money.

Good luck.

Kerry Kerstetter  

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/21/2009 06:01:00 PM Send this post:

Subject: 1040/ S corp question

I saw your website and think it is great... but I have one question.

I have a 1-person Massachusetts S corp (I own all shares and there are no other employees) and have filed a separate return for it in past years.

Question: Can I include this S corp on my personal return, or do I have to file it separately?

Thank you!

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/31/2009 02:24:00 PM Send this post:

Q:

Subject: Rental property

Dear Kerry Kerstetter,

One of your clients is our friend and realtor. We are thinking about investing in rental property for tax purposes and later to use as a retirement source once the properties are paid for.
She told me that you have helped her so much regarding taxes. She suggested I should contact you to ask the following question.

If you are in the 35% tax bracket- do you get a better tax break by having the rental property under our names or by setting up a corporation to manage the rentals. We just want to be sure there will be a tax benefit by obtaining rental property and we have been given different advise and are not sure which is correct. She said you would know the answer to this question.

Thank you for your time.

You are going to need to work with your own personal professional tax advisor on this matter because there is no easy cut and dried answer.

For example, it depends on what occupations you and your husband have. If either one of you qualifies as a Real Estate Professional (REP), you will be able to deduct your net rental losses against your other kinds of income, with no limit.

However, if neither of you qualifies as an REP, your net rental losses will be treated as nondeductible passive activity losses and will have to be deferred until future years when you have some passive activity profits, such as from the sales of rental properties.

I can tell this by the fact that you claim to be in the 35% Federal tax bracket, which means your Taxable Income is well over $300,000. The passive activity restriction phases out any rental loss deduction if your Adjusted Gross Income exceeds $150,000.

Using a C Corp sometimes makes sense because it is allowed to deduct rental losses up to the amount of other income. However, there is a downside to owning real estate in C corps because they don't have the same special low long term capital gains tax rates that individuals can use.

A strategy that may be able to give you the best of both worlds is to own the property individually and lease it to your C corp, which can then operate it as a rental.

Your C corp would need to have net income from other operations in order to be able to claim the rental losses. If you don't already have a C corp, even without the rental property issue, one could be used to shift some of your 1040 income so that you aren't in such a high tax bracket. I have a lot of info on using corps on my website.

Your own personal professional tax advisor should be able to help you come up with the best strategy for your particular situation.

Good luck.

Kerry Kerstetter

Thank you so much for your response. If you should ever take new clients please keep us in mind. This information was very helpful and I will look at your website.

Sincerely,

Labels: corp, Rentals

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2009 11:24:00 AM Send this post:

Q:

Subject: c corporation question

I am utilizing the information that you provide as a guideline to set up my C Corporation. Are you saying to use Corporation or Inc., etc. in the name? It sounded like you are saying to avoid these words.

Thanks very much.

Regarding the selection of a name for a corp, you seem to be misunderstanding the point I was trying to make.

I have never had any problem with the use of a corp signifier in the official name, such as Corporation, Inc, or Ltd. In fact, most states require one of these to be used as part of their chartering.

What I have long seen as a bad choice was to have the owners' personal names as part of the corp name. Too often, people just put Inc or Corp after their own names.

One of the many benefits of working with a corp entity is the ability to have more privacy and anonymity than you would have by using your own personal name. As we all know, in this day and age there are fewer and fewer aspects of our personal and business lives that we can keep private. This is why I have aways liked the idea of using a generic non-descriptive name for the official corp filing. I have seen people use a few initials, parts of their kids' or grandkids' names and even completely made-up words for their official corp names. It doesn't matter that nobody can understand the meaning of the corp name. It's nobody else's business.

Even with the generic non-descriptive official corp name, you can still also lock in some DBAs to show to the public if that would be helpful for conducting your business operations. Behind the scenes tasks, such as buying and selling properties and filing tax returns, would be under the generic official corp name. This makes snooping on your confidential affairs more difficult with Google and other tools at everyone's disposal nowadays.

I hope this helps you better understand my feelings on naming corporations.

Good luck.

Kerry Kerstetter

Kerry,
I am sorry. I did misunderstand. Thanks so much for the clarification. I look forward to working with you in the future.

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/13/2009 10:20:00 AM Send this post:

Going through some old emails in my in-boxes, I came across this short piece from PC Magazine, reviewing some of the main online services for setting up a corp or LLC. 

The article glosses over the critical issue of consulting with a qualified professional tax advisor before deciding which particular entity is appropriate for a particular situation.  The following generalization is completely wrong and misguided.

For most small businesses, the C corporation option isn't in play, given its complexities and required reports and other filings, along with corporate taxes.

As I’ve explained frequently, C corps are very often much better fits than S corps and are actually much less complicated to handle than are S corps and LLCs. 

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/29/2009 02:52:00 PM Send this post:

Labels: comix, corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/23/2009 11:16:00 AM Send this post:

Q:

Hi – Very helpful information on the web. I have one quick question – if my company is a C Corp and has a loss can I deduct that on my 1040? Thanks!!

A:

No.

An S corp can possibly have its losses flow through to your 1040, but a C corp doesn't work that way.

Setting up a corp without understanding how it works was very foolish and dangerous.  You need to get with a professional tax advisor ASAP to straighten things out before you do any more damage.

Good luck.

Kerry Kerstetter

Follow-Up:

Its kind of you to respond but there is no need for that demeaning attitude.

My reply:

I'm sorry if I offended you, but I assure you that it is for your own good.

I have long had a reputation for telling it like it is and not sugar-coating the truth.  Anyone writing to me for advice can expect that kind of response.

In your situation, it is obvious that you, as do may other business owners, jumped into setting up a corporation all by yourself without consulting with knowledgeable professionals.  The consequences of this reckless and irresponsible act can be very expensive as you most likely have already violated all kinds of tax and legal requirements.

For your own sake, you need to start working with a qualified tax pro ASAP before you get yourself into more trouble.

Good luck.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/24/2009 08:23:00 PM Send this post:

Q:

Subject: C Corporation and S Corporation question

S-Corporation.  I did some research and I believe that I qualify as I am the only officer/member.  My questions are:

1.       Based on the researc0h I did, it seems that with a c-corp I can wait until November to file my taxes (no gains, only losses) which is the anniversary date.  Is this correct?

2.       If the s-corp falls into the same category as individual income tax, I assume that with an s-corp, the deadline to file the taxes is april 15th.  Is this correct?

3.       Assuming number 2 is correct, if I wait until after April 15th to convert my c-corp to an s-corp, do I still have to file the taxes by November or can I wait till the following year (January through april 15th) to file the taxes?

I am totally clueless with this and the IRS website is somewhat confusing.  Please help me.

Thanks so much!

Have a beautiful evening!

A:

You need to be working with a professional tax advisor before you do anything else because your research is obviously not working.  Just from the items you mentioned, there are several misconceptions you have, and I'm sure you have dozens more that you didn't mention.

Here are just a couple of issues that you are confused about.

Tax Year - If you remain a C corp, its tax year can be set to end at the end of any month prior to the one year anniversary of the incorporation.  There are many reasons for using a tax year other than December 31, as I mentioned on my website.    The corp tax return (1120) or an extension (7004) is due to IRS by 2.5 months after the end of the tax year. Once you have filed your first 1120 and established the tax year for that corp, it is set in stone.

If you do successfully convert to an S corp, its tax year must go from January 1 through December 31 and its filing deadline will be the next March 15.

While there are some exceptions for filing the S election (2553) late, the normal deadline is by March 15 of the year in which you want it to take effect.

Before you take the step of electing to be an S corp, you most definitely need to work with an experienced professional tax advisor to see if that is a good idea and to make sure you understand completely how to operate your corp (C or S).  You are guaranteed to get yourself into serious trouble if you continue to try to muddle through these things on your own, if you haven't already.

Good luck.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/08/2009 08:06:00 PM Send this post:

Q:

Subject:  Filling my s-corp and 1040 returns together

Hello,
 
I found your email via an article you wrote on http://www.taxguru.org/corps/scorp.htm. If you don't mind I would like to ask you if it is possible for me to include the money I spent or invested in my s-corp on my 1040 taxes form that I will be filling from my regular employment. I have a regular job where I work 40 hours a week and I have my S-corp that I am investing in with my personal money from work. I am still working on my business and hence have not generated any revenue in my business.
 
Thanks, I appeciate your time and answers.

A:

You need to be working with a professional tax advisor before you do anything else because you have very obviously gotten in over your head by setting up an S corp without having a clue as to how it works.

Just from the items you mentioned, there are several misconceptions you have, and I'm sure you have dozens more that you didn't mention.

Money you invest into the S corp isn't a deductible item. However, if there is a net operating loss inside the corp that can be passed through to your 1040, you may be able to have some offset to your W-2 income.

Before you go any further, you most definitely need to work with an experienced professional tax advisor to see that your S corp tax return is prepared properly and then that your 1040 is also prepared correctly.   You are guaranteed to get yourself into serious trouble if you continue to try to muddle through these things on your own, if you haven't already.

At this late date, you should be filing an extension for your 2008 1040 in order to give yourself enough time to get things done properly.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for the advice. I will contact a tax advisor. It's for a website that I created and the only monies or funds that I have spent are $1000.00 and my monthly hosting account which is $10.00 per month.   

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/08/2009 07:53:00 PM Send this post:

Q:

Subject:  article on S Corp termination (converted to C Corp)

Thanks, informative.
 
2 1/2 month rule, 5 years, etc.
 
My question, if you'd be so gracious to answer...
 
It is a "formal request" to the IRS?
Just a letter??
No Form (reverse 2553 form)???
 
Thanks!

A:

Surprisingly, there is no official IRS form for revoking the S election.  A statement including certain info is required to be submitted to IRS.

Your own personal professional tax advisor may already have a template to use.  There are also other ones available from tax reference publishers, such as the following ones I copied and pasted here.


From Page 19-5 of TheTaxBook:   

Shareholder revocation. The S corporation election may be revoked with the consent of shareholders holding more than 50%  of the shares of stock of the corporation. A revocation made on or before the 15th day of the third month of the taxable year is effective as of the first day of the taxable year (March 15 for a calendar year corporation).

Revocation made after the 15th day of the third month of the tax year is effective for the following taxable year.

Revocation can be made for a prospective date which is on or after the date the revocation is made. [IRC §1362(d)(1)]

Corporation statement. The corporation files a statement of revocation, signed by an officer who is authorized to sign Form 1120S, with the IRS Service Center where the original election was filed.
Include the following information:
• A statement that the corporation is revoking its S corporation election under IRC Section 1362(a).
• The corporation’s name, address, and EIN.
• The number of shares of outstanding stock.
• The effective date of the revocation.

Shareholder statement. A statement signed by the shareholders, under penalty of perjury, which includes:
• The name, address, and EIN of the consenting shareholder.
• The number of shares owned by the shareholder.
• The date the shareholder acquired the stock.
• The shareholder’s tax year end.



From the CFS Tax Corresponder program:   


Statement to Revoke Sub chapter S Election (IRC Section 1362(d))


To:  Internal Revenue Service
    <insert service center address>


Re:  [Client: Taxpayer & Spouse name(s)/Company Name]
[Client: Street address, Apt/Ste/PMB #, plus line 2 (if any)]
    [Client: City, State  Zip]
    ID: [Client: Taxpayer's SSN/Company FEIN]


The above mentioned company hereby revokes its election under IRC Section 1362(a) in accordance with IRC Code Section 1362(d).  As of  < insert date >, there are < insert number > shares of issued and outstanding shares of stock in [Client: Taxpayer & Spouse name(s)/Company Name].  Attached are signed consents by all shareholders holding more than one-half of the issued and outstanding stock in [Client: Taxpayer & Spouse name(s)/Company Name].


[Client: Taxpayer & Spouse name(s)/Company Name]


By: ____________________________
             (Title)

Date: _____________________




Attachment of Shareholders to Statement of Consent to Subchapter S Revocation


The undersigned shareholders in accordance with IRC Section 1362(d) hereby consent to the revocation by the [Client: Taxpayer & Spouse name(s)/Company Name], ID# [Client: Taxpayer's SSN/Company FEIN] of its election under IRC Section 1362(a).  Such revocation is effective < insert date >.



By:  _____________________________________    ___________________
    <insert name of shareholder>    Date
    <insert address>
    <insert city, state, zip>
    ID: <insert ID#>


By:  _____________________________________    ___________________
    <insert name of shareholder>    Date
    <insert address>
    <insert city, state, zip>
    ID: <insert ID#>


By:  _____________________________________    ___________________
    <insert name of shareholder>    Date
    <insert address>
    <insert city, state, zip>
    ID: <insert ID#>


At the time of this revocation, the issued and outstanding shares of the  [Client: Taxpayer & Spouse name(s)/Company Name] are held as follows:

    <insert shareholder>    <insert number of shares>
    <insert shareholder>    <insert number of shares>
    <insert shareholder>    <insert number of shares>




As I have mentioned on several occasions, before you take the step of revoking the S election and subjecting your corp to the limitations that entails (12/31 year end, etc), you should work with your own professional tax advisor to see if setting up a new C corp in addition to the existing S corp would be a better plan.

I hope this helps.  Good luck,

Kerry Kerstetter

Follow-Up:

Really cool of u.  Actually its a smllc to c corp.  Form 8832.  And I am a tax advisor.  Pleasure to make your acquintance!

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2009 04:06:00 PM Send this post:

Q:

Subject:  s versus c article

I read your article with some interest and have a question about your tax splitting.

Lets say the C-corp does a split and takes $50k in a 15% bracket. Now what? A C-corp doesn’t have to buy food or put a kid through college. Why is it helpful for the C-corp to have 50k in the bank, especially if you are an individual with small company and just want all your money in your pocket so you can buy cocaine?

A:

The effective use of C corps to shift and smooth out income is a multi-year process; so looking at one year's end result isn't the best way to evaluate it. Any experienced professional tax advisor should be able to assist you with implementing these tactics in the best way for your particular goals and situations.

So, in addition to your particular financial priorities, be sure to budget enough money to pay for the services of a good professional tax advisor.

Good luck.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2009 02:52:00 PM Send this post:

Q:

Subject:  C Corporations

How do I find an accountant in my area that is comfortable with C corporations. It seems like each one I talk to wants to continue to steer me away from them?

 
A:

That is frustrating; but look at the good side of that situation.  Any tax pro who doesn't understand how to utilize C corps effectively is doing you a huge favor by admitting his/her shortcomings up front, saving you from wasting a lot of time.

As I have repeatedly said, C corps are not automatically a one size fits all solution for everyone any more than S corps are.  Any tax pro who can't logically explain his/her rationale for recommending any particular strategy, including the fact that all of the pros and cons that I have spelled out have been evaluated, is to be avoided.  Anyone who automatically rules out C corps without asking you a ton of questions and tries to assume that an S corp is automatically the right approach is too lazy and/or ignorant to be trusted.

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.  

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.  

You should note that geographic location should not be the main criterion for selecting a tax pro.

I wish I could be of more assistance; and I wish you the best of luck.

Kerry Kerstetter  

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2009 02:48:00 PM Send this post:

Q-1:

Subject:  S-Corp vs. C-Corp

Kerry,

I read your article on S-corporations vs. C-corporations.  Thank you.  The article was very informative.

I suppose one benefit of S-Corp status would be in a situation where the entity generates significant losses early in the life of the company and the individual has other taxable ordinary income from which these losses can be deducted.  The present value of deducting those losses would likely be beneficial versus being trapped as NOL's in a C-Corp. 

Am I thinking about this correctly?

A-1:

That is one way to look at this. However, you have fallen into the trap of believing that a business only needs one entity for its entire existence.

A more useful approach would be to use an S corp during the loss years if they will be helpful on the 1040s of the owners and then, when it becomes profitable, set up a new C corp to use to accomplish such things as smoothing out the income, doubling the potential Section 179 deduction, and shifting income between fiscal years.

Any creative tax pro should be able to know how to use multiple entities for maximum tax savings.  Anyone who claims that you have to select one single entity at the beginning and use it exclusively for the lifetime of the business should be avoided.

Thanks for writing.

Kerry Kerstetter

Q-2:

Thank you.

If you expect losses in excess of your basis due to the use of debt to finance an acquisition, is there a structure that makes the most sense
to deduct those losses against other income?

Thanks again.

A-2:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.  You will need to work directly with an experienced tax pro who can analyze your unique circumstances.

I wish I could be more help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time.

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.   

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.  

You should note that geographic location should not be the main criterion for selecting a tax pro.

I wish I could be of more assistance; and I wish you the best of luck.

Kerry Kerstetter

Follow-Up:

Thank you

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/16/2009 04:34:00 PM Send this post:

Q-1:

Subject:  Small Business asking for a little help or direction.

Dear Kerry,

I came across your website while researching corporate tax information and was very impressed with the information and your desire to limit tax liability.

I was hoping you could offer a little help on my businesses.

Last year I purchased 3 small businesses from a single owner. The businesses sell very similar products, but are run as 3 separate corporations. 2 are “C” corps and 1 is a “S” corp. All located in Chicago, IL. Combined total annual sales of $2.8 million for all 3 companies.

I hired a new accounting firm to review my financials, do tax planning and file annual tax returns.

They are strongly recommending I change the 2 “C” corps into “S” corps. To avoid the future possibility of “double taxation” on dividend payments and keep things simple by changing all 3 companies to a true calendar fiscal year.

Historically over the last 10 years these businesses have never paid dividends. So I don’t see the benefit. The previous owner managed expenses across the 3 companies to avoid paying excessive taxes and never paid himself dividends just a nice salary.

After doing some research on line and reading your web site I feel like I have received some very bad advice. I believe I need to find a new accounting firm that has my best interests in mind. Also, with the new administration coming in January I think keeping my income as low as possible on my 1040 will be more important than ever.

I want to aggressively manage the businesses to limit my tax liability and I need a financial firm who thinks the same way.

Can you kindly offer some advice on how to proceed.

I would love for you to handle my financials or provide financial advice.

Any advice, direction or referral you can offer would be greatly appreciated. Do you know of a good professional tax advisor near Chicago?

Thank you in advance for your time and response.

Thanks and Best Regards,

A-1:

You are correct in recognizing the fact that your current accountant is not looking out for your best interests.  Unfortunately, there is no shortage of lazy short-sighted tax pros who try to force everyone into a one size fits all approach, often just using S corps.

As I have been preaching for decades, there are huge tax and liability saving opportunities by using multiple corps with different fiscal years.  The ability to smooth income out and even multiply certain tax breaks, such as Section 179, can save huge amounts of money in taxes. As I have explained countless times, the big fear of double taxation is crazy.  Any creative tax advisor worth his/her salt can find methods to shift income in ways that avoid the same money being taxed twice.

Using nothing but S corps for profitable businesses is completely counter-productive, especially in this environment.  That puts everything onto your 1040.  With the incoming administration in DC hyping the fact that they intend to soak people in the upper income levels, adding more income to your 1040 will just make you a more attractive and inviting target for more of your income to be confiscated and spread around. Unless you agree with that definition of being "Patriotic," the goal for preserving more of your hard earned income should be to take steps to keep your 1040 income down as low as possible and slide under the radar of the Socialists who are now in charge of our lives.

I am still not at a point where I can accept any new clients; so you will need to keep looking for someone who will help you reduce your taxes instead of trying to structure things to make it easier on themselves, as it sounds like your current accountant is doing.  You may want to start with the tax pro who helped the previous owner of the businesses because it sounds like s/he understands how to work with multiple entities in a tax efficient manner.

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.  

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.  
You should note that geographic location should not be the main criterion for selecting a tax pro.

I wish I could be of more assistance; and I wish you the best of luck.

Kerry Kerstetter

Q-2:

Dear Kerry,
Thank you very much for your detailed response and advice. We are in agreement on the correct strategy for limiting taxable income for my businesses and on my 1040. I have begun a search for a new tax pro who will have my best interests in mind.
I greatly appreciate your comments.
Would it be possible to add my name to you waiting list of potential customers should you ever be ready for additional clients?
Please let me know.
Thanks again for your response.

A-2:

I will keep you posted if my workload ever allows me to accept any new clients.  I do have several names already on the waiting list; so I will be very selective as to the criteria any new clients must meet.

One of the most important factors will be that they are already up and running with proper accounting on QuickBooks for each of their entities.

Good luck.

 Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2009 01:04:00 PM Send this post:

Q:

Subject:  C or S corporation, no employees/partners

I am not sure if you reply to emails asking for additional advice, but I'll give it a shot.
 
I am starting a marketing company in Ca. with no employees. (new babies, need money)
 
I do have a full time job, and this will be on the side.
 
>From your article a C corporation makes more sense for me.
 
But, I am scared of ticked off tigers, cobras, AK-47s, and the IRS.
 
Will I be asking for trouble if my company makes no money, and I decide to end the corporation in a year or so?
 
Does my separate tax return get red-tagged if I start a corporation that does/does not make money?
 
Thank you in advance for your time.

A:

You really need to be working with an experienced professional tax advisor to set up the best strategy for your unique situation.

A corp that only has losses doesn't really attract a lot of dangerous attention from IRS; so that really isn't a concern here.  However, there are some other more important issues that you need to evaluate.

For example, I am wondering why you are so anxious to jump into the cost and hassle of setting up a corp right now.  Most small businesses start off as Schedule C sole proprietorships and then evolve into a corp entity as they become more profitable.

Sole proprietorships cost nothing to set up or dissolve; unlike corps in Calif, which have a $800 minimum annual tax.  Losses from Schedule C can also be used to offset other income on your 1040. While losses from S corps can be used to offset other 1040 income, C corp losses can't do that.

Please consult with a tax pro before you take that expensive leap into a corp.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for taking the time to answer my email Mr. Kerstetter, especially in these holiday times. I have taken your advice, and will be seeing a tax pro. ASAP to seek some advice in these matters.

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2009 12:49:00 PM Send this post:

Q-1:

Subject: S Corporations

Tax Guru,

I am a Obama supporter but work at a S Corporation.  Needless to say, I am getting hammered for my voting preferences. 

Can you tell me if Obama will destroy S Corporations.  I read he would increase from 35% to 39% on scorps but can not find any evidance that he will not due away with them. 

Any help would be greatly appreciated.

Obama & Scorp supporter.  

A-1:

S corps don't pay taxes. Their income is reported and taxed on the 1040s of the shareholders.

Since Obama is promising to raise the tax rates for 1040s, the end result will be higher taxes for the shareholders on their S corp income.

I don't see any push to eliminate S corps because they are often taxed at higher rates than C corps.

I hope this helps you understand.

Kerry Kerstetter

Q-2:

Thank you for your response.

I currently have around 40,000 in stock through our S-corp.  However I have never seen my stock or dividends on my yearly income. 

Our company is roughly 2400 people, employee owned, with 6 "owners", 5 real people and one account (representing the esop balance). 

If I dont pay taxes on my dividends ($5.50 per share last year) until I retire then is S-corp advantagous to C-corp?

Thank you so much for your responses.  I am trying to understand the situation but find it beyond my grasp at this time.

Please advise..

It sounds like you have an interest in a tax deferred retirement account. You're little vague on the dividends you received, but I'm assuming that those were deposited into your share of the retirement account and not actually paid out to you directly.

While the details of retirement plans can vary, the basic concept is that you pay no taxes on any income it earns while your money is inside the plan. When you start to draw it out, you will pay income taxes on your distributions at ordinary income tax rates for the years of the withdrawals. If you are under 59.5 years old when taking distributions, you may also be subject to the additional 10% Federal (+ your state's) early withdrawal penalties if you don't meet any of the exceptions for that.

I really don't see how whether your employer is a C or S corp will make any difference to you in regard to your taxes on your share of this retirement account.

Your retirement account administrator and your personal professional tax advisor should be able to explain how this all works in much more specific detail for your unique situation than I possible could.

Good luck.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/03/2008 02:20:00 PM Send this post:

Q:

Subject:  S corp's

Hi I just found your site and read about S vs C Corp's.  We have been an S Corp for years.  Some questions I have is:  money taken out by shareholder ( my wife and I) should that be ledgered under personal income or shareholder loans?  Is that money taxable?  My CPA says it is not taxable.  Why would I ever pay myself in wage form if this is the case.  I see as our profits get up to 65,000 or more maybe we should start a C Corp.  How so you smooth out the money in a C Corp.  I don't understand.  Maybe I should get a new CPA? 

Thanks

If you've been operating an S corp for any period of time and your professional tax advisor hasn't explained to you all of the details of how cash distributions are treated, it does sound like s/he has dropped the ball.  That all should have been explained to you prior to your even setting up the S corp.

Likewise, if your professional tax advisor isn't aware of how to effectively utilize a C corp to smooth out your taxable income, it is time to find someone who understands this very basic tool of tax planning.

Good luck.

Kerry Kerstetter

 

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/26/2008 08:21:00 PM Send this post:

(Click on image for full size)

Labels: comix, corp, TaxHikes

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/25/2008 09:23:00 PM Send this post:

Labels: comix, corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/25/2008 09:52:00 PM Send this post:

Q:

Subject: C- corp tax rates

Is this C-Corporation Income tax rate schedule published on your website for 2007 or 2008?

Thank you for your response

A:

Unlike individual income tax rate brackets, which are adjusted annually for inflation, the corporate tax rates are only adjusted every few decades, if ever, by our rulers in Washington.

The corp rates shown on my website have been in effect for the past several years and will most likely be in effect for several more years.

I hope this helps.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/18/2008 06:19:00 PM Send this post:

Q-1:

Subject: Choosing a fiscal year

Hello Tax Guru,

I was not sure if I can post on your blog, I had a question about Fiscal year and S-Corp. Is there no situation where an S-Corp can have a fiscal year end on June 30th like you suggest for other corporations or am I misunderstanding the S-Corp?

thanks, great blog!

 A-1:

 S corps are required to use the same tax year as their shareholders, which is almost always a calendar (December 31) year.

If income shifting between years is a critical factor, a C corp is an easy way to accomplish this.

Your personal professional tax advisor should be able to help you set up a structure with one or more entities to achieve whatever goal you have.

Good luck.

Kerry Kerstetter

Q-2:

 Kerry,

thanks for the great info. Our challenge is that we are receiving a product order prepayment from the US DOD for $250K and may not have to pay our factory till after Jan 1st. 2009 and we don't want to pay taxes on the $250K sitting in the bank, what would you do?

Will will apply for S-Corp status with IRS.

thanks for your help!

A-2:

Using a C corp to smooth out that income and have control over the timing of the taxes on it is a very simple task for any experienced professional tax advisor.  You need to start working with one ASAP.

Good luck.

Kerry Kerstetter

Follow-Up:

 Thanks again Kerry!

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2008 07:10:00 PM Send this post:

As has been quite obvious from the never-ending emails I receive, there is no shortage of confusion over the proper business entity to use.  As I have to continually point out, the biggest mistake is when people try to make these choices on their own, without the assistance of professional advisors.  That is nothing short of reckless and is no way to start off a business operation.

However, as I have pointed out, it will save time and fees if business owners will acquaint themselves with the basics of the various business structures before meeting with their professional advisors.  In that vein, I pass along this IRS Fact Sheet that briefly describes the basics of the four most commonly used business entities.

The best bit of info in this Fact Sheet is at the very end:

It may be important to seek advice from business experts and professionals when considering the advantages and disadvantages of a business entity.

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/23/2008 04:51:00 PM Send this post:

As I’ve explained countless times, there is no reference material in existence, on the web or off, that can substitute for the services of a good professional business advisor, who should analyze the pros and cons of the various business entity types in relation to the exact situation at hand.  However, some review of the basics beforehand can save a lot of expensive time with the professional.  I always feel bad about charging clients almost four dollars a minute for explaining the basic concepts of corporations and LLCs, that they can read about on their own. Before I meet with clients to discuss what kind of entity or entities makes sense for a particular situation, I strongly encourage them to read over the materials I have posted on my website.

I just came across some new reference materials on the basics of selecting a business entity from the Intuit company, MyCorporation, which can be downloaded for free.

WMV video “Selecting the Right Business Entity”  showing how to use a decision tree method of selecting an entity.  This is 29.5 minutes long and the file is 21.3 mb in size.

20 page PDF file “Guide to Forming Corporations & LLCs”   File size is 1.8 mb.

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/22/2008 03:12:00 PM Send this post:

Q-1:

Subject: business tax question

Hi,

Thank you for your article on sub s vs. c corp.  I am a licensed professional in healthcare and have a sub s.  I have a sub s, as years ago when I started it, my profession did not have a license in my state and my attorney at the time advised me to start this type of corp.  I do not remember the specifics.  Here we are 13 years later and several attorney and accountant later.  As I make another accountant change, I am advised to consider starting a c corp.  To keep my sub s to do my business so I do not have to change contracts etc.  To have the sub s provide management services for the c corp, which will really have the clients  have the c corp be profitable and the sub s operate at a loss.  This is a new way of thinking for me.  Is it legal?  It sounds a bit on the edge?

 

Thanks for responding.  Each new person seems to add something and it becomes very confusing.

A-1:

Using both an S and a C corp together has been a very useful tactic for decades for exercising more control over business owners' taxable income.  Too many people make the mistake of thinking everything has to be all or nothing with everything run through a single entity. Depending on your unique situation, using an assortment of entities can result in huge tax savings, as well as better liability protection from nuisance lawsuits.

Working with a creative professional tax advisor who understands how to properly utilize multiple entities is essential, as is up to date accurate accounting because many of the income shifting decisions depend on knowing how much income you have at any point in time.

Good luck.

Kerry Kerstetter

Q-2:

Thank you for your reply.  Would you indulge me in another question or two?

Your reply certainly confirmed the advice of my new accountatnt.  But, I am still skeptical.  There are so many dishonest people, I am apprehensive!! These are my concersn or things I notice.

This new accountant, John Anderson, does not market himself as a CPA.  His business card says CEO of his consulting company.  When I asked if he was a CPA, he said yes.  I checked AZ licensing, but he is not.  I confronted him and he said he had a PA license.  I checked PA and it expired in '86.  Is that a big deal?  If you have the info and knowledge, I guess you do not need a license to give advice and or prepare taxes.  I am feeling like his answers are not necessarily honest.  Further, he asked for POA to be able to sign to get c corp and do other things for the company.  I am reluctant to give him that power.  Is that usual?  Finally, he mentioned that under the c corp we could in some way deduct our life insurance premiums.  He discussed the keyman policy or by/sell.  It makes sense to me, but my bother in law who sells life ins in TX is adamant that you cannot deduct life insurance. So, I am confused and apprehensive.

Thanks for your time.

A-2:

Anyone you work with should be completely open and honest about the status of his/her licensing.  I'm confused as to which PA you are referring to.  Do you mean licensed as a CPA in Pennsylvania or licensed as a Public Accountant, which is a designation similar to CPA that is rarely seen any more?

While CPAs, attorneys and EAs (enrolled Agents) are automatically eligible to prepare tax returns, each state has its own rules regarding the special licensing of others.

Asking for a power of attorney up front to submit incorporation papers on your behalf does sound very unusual and is not something I have ever requested from any clients, nor would I advise you to do.  While the amount of personal involvement you choose to have in the business transactions is up to you, I would be very careful of delegating too many things to other people.  There are too many things that could go wrong.

There are so many varieties of life insurance policies and ways in which to handle them that there is no easy answer in regard to the deductibility of premiums or whether company paid premiums are taxable as income to the beneficiaries.  There are ways by which to have the ownership of the policy vested in a special trust or in the employer's name that may be useful.  You need to work with an experienced advisor to see if there is a way to structure things so as to accomplish your specific goals.

No offense to your brother in law, but the claim that life insurance premiums are never deductible is wrong.  There are various occasions when they are.  For example, one that I encounter quite often is when a lender requires a life insurance policy as a condition of making a loan.  For decades, I have been showing those premiums as deductions on client tax returns, with descriptions that they are required by the lenders. IRS has never had any problems with any of them.

I hope this helps.

Good luck.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/21/2008 02:07:00 PM Send this post:

Q:

Subject:  Double taxation?

Kerry,

Thanks very much for your informative and enjoyable blog.

I often hear the line that C corporations are a bad choice because of the double taxation issue. I know you have explained before that there are many ways to avoid double taxation.  But I have tried to figure out why "double taxation" is really worse than the alternative.

Let me explain my thinking. As I understand it, the first $50,000 in income for a C corporation is taxed at 15%, and any dividend that would be paid to shareholders is also taxed at 15% (maximum). Combined, that is a 30% tax rate.  This seems like a bargain compared to the corporation paying a salary:  The individual would likely pay a 28% tax rate on the salary (assuming the individual has already reached the 28% bracket from other income), and then would pay an additional 15.3% FICA tax (half paid by the corporation), for a total federal tax rate of 43.3%.  Since 43.3% is more than 30%, isn't "double taxation" actually the preferred outcome here, at least for $50,000 worth of corporate income?

Thanks,

A:

I'm too busy right now to go into too much detail.

However, you may have missed the point that I am not a fan of using payroll as a means of shifting income from the corp to the 1040 because of the payroll taxes.  We use unearned income, such as interest, rents and royalties, which have no payroll taxes associated with them; just normal income tax.

By properly shifting income back and forth, we have been able to very easily achieve a maximum Federal income tax of just 15% overall; not the 30% under your double taxed scenario.

A good tax advisor, along with accurate up to date QuickBooks data, should be able to help you achieve this.

Good luck.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/23/2008 07:29:00 PM Send this post: