Are S corps advantages destroyed by some state laws?

[Slav4ikMD]

Question on income vs distributions:  so in my situation I have a bunch of W2 income and then have a PLLC for a side business (private practice and consulting), which yields me say 100k a year.  So if I pay myself a salary of 50k off that, does that become a red flag as such a low salary for a physician, or given that they see my other large W2 numbers it would actually be in my advantage as it gets added to what I made as a W2?  I think that 50/50 is reasonable in my case, what do you guys think?  Any other thoughts for my situation?

[GatorMD]

A few of my colleagues have created an S-corp and I looked into it briefly last year. My accountant estimated it might save me around $2k per year after fees, but I couldn't stomach paying myself a "reasonable salary" of $150k when I am paid $350k as an hourly IC. Not sure how you defend that in the event of an audit. It just makes me uncomfortable and not worth the potential savings to me. I'd rather concentrate on other tax savings strategies like maxing out all of my retirement accounts etc.

[jfoxcpacfp]

(Post removed due to duplicates resulting from bug in forum files)

[docnews]

Johanna Turner wrote:

 

The reason to choose a corporation or LLC has more to do with liability protection than saving taxes. This is an often-misunderstood point. For you to be a sole proprietor may not be as big a risk today since you are just starting out and likely have more debt than assets, but it will be a future concern. Your malpractice policy will cover claims on your work as a professional but not if you kill a child crossing the street on your way to work. And not if an employee makes an error that causes loss or harm to someone while he/she is on the clock. The way to cover these and other risks are with adequate insurance, including a sizable umbrella policy, along with a business structure that shields your business from personal assets.

 

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Isn't the liability protection overblown? I'm setting up an umbrella insurance policy for personal protection and in my state it is unheard of for there to be a malpractice claim higher than the limit. This s corp accounting/fee/taxes costs a few thousand a year which makes it a questionable expensive "insurance policy" on the rare likelihood that I would be sued successfully for greater than my umbrella insurance limit AND that my state would allow my s corp income to remain out of the grabs of the lawyers. Plus these pass-through entities pass the money right through to your personal bank accounts that have no extra protection, correct?

[jfoxcpacfp]

For practical purposes, the rule of thumb for income versus distributions (not exactly dividends) from an S-corp that has been used in the past by the IRS is 50:50. iow, the IRS will typically not challenge a business owner for abusive distributions if you take at least as much salary as you do in distributions. I don't know if you nailed that by luck or you did some research, but you got it. However, when the business owner is the sole income producer (i.e. - if you quit working, your business would cease to bring in revenue), you can expect the IRS to challenge that ratio in an audit. I would lean toward 25% dist's and 75% salary and I would put my recommendations in writing.

Yes, you will potentially save some taxes as an S-corp, but I would also question that a $150k salary would be accepted as "reasonable" given similar salaries for similar work in your profession. If the typical salary for your specialty is $150k, though, then you would have a better argument.

The reason to choose a corporation or LLC has more to do with liability protection than saving taxes. This is an often-misunderstood point. For you to be a sole proprietor may not be as big a risk today since you are just starting out and likely have more debt than assets, but it will be a future concern. Your malpractice policy will cover claims on your work as a professional but not if you kill a child crossing the street on your way to work. And not if an employee makes an error that causes loss or harm to someone while he/she is on the clock. The way to cover these and other risks are with adequate insurance, including a sizable umbrella policy, along with a business structure that shields your business from personal assets.

As for state taxes, relatively speaking, TN is a business-friendly state but you will have to pay TN Excise taxes on certain profits at 6.5% if you are incorporated or are a SM-PLLC. You also pay Franchise tax on your net worth (probably minimal for your biz) + your real and tangible property at 25 cents per $100 with a minimum $100. There are adjustments in the calculations so I can't comment on what you would end up paying but you would probably be paying more. Again, though, the liability issues far outweigh the tax differential (imo).

Too much to cover here in depth; this is a serious discussion to have with your financial advisor. Hope this helps.

[docnews]

Here is my situation: new independent contractor physician with about $300k/yr expected income and I was looking into the advantages of incorporating my single person business.

From my research an S corporation can save you the medicare tax 2.9% (3.8% at surtax levels) on the amount you dare pay yourself in dividends. The reasonable salary for a physician I would argue would at least be $150k/yr, so the dividend amount would be 50% / the other $150k, saving about $5k/yr. But ambiguous accounting costs and maintenance fees could easily reach $2k/yr. So net $3k/yr is nothing to scoff at as long as it takes less than 1 day of work per year.

But then I did more research and learned that every state handled an S corp pass-through differently. Some respect, some place fees, some ignore. Well in Tennessee it appears that they ignore ... then place you under state corporation tax law with an excise tax of 6.5%! So in a sense I would be penalized 3.6% of all dividend income through a S corp!! So who would setup an S corp in Tennessee? I guess some interstate commerce would be forced to follow TN law but am I correct in stating that whoever sets up an S corp for a single person corporation is harming themselves?

I guess in some ways I'm glad that my conclusion thus far is the easy way (sole proprietorship) might be the best way.

Any doctors incorporating just themselves and seeing large savings/benefits for their troubles? Has anyone set-up an S corp only to find out they actually pay more in taxes?