Are S corps advantages destroyed by some state laws?

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EnjoyIt wrote:

Johanna Turner wrote:

@EnjoyIt – I apologize for overlooking your list.

1) You would need to hire your spouse for group health insurance (some insurers do this) in a sole proprietorship. In an S-corp or LLC, you, as >2% owner would include the cost of health insurance in your W2, which would then be deducted on page 1 of your form 1040, so it’s a wash. In a PSC, you would be treated as any other employee (non-reportable health insurance benefits).

2) Not true. In fact, there are limitations on self-rentals in an S-corp. A sole proprietorship is the best form for deducting home office expenses. That said, I have yet to see that you are better off using the $5/foot shortcut unless it is a very small office in a relatively inexpensive house.

3) If you have a home office and pay to park elsewhere (not as an employee but for work as a contractor), you can deduct parking, tolls, public transit, etc. as a sole proprietor. As an employee of your corporation, you can do the same, but I recommend an accountable plan.

4) Yes, you can establish a DB plan as a sole proprietor.

The medicare tax may be the main tax benefit but the reason for setting up a corp or LLC is not mainly for tax savings but other intangible benefits, such as protection. Having a separate entity makes it far easier to transfer part of your business to partners, too. Hope this helps.

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This helps a whole lot.

My tax guy has me set up in two corporations

The PLLC taxed as an S-corp which takes in all income and pays a salary to me as well as 401K contributions.  There are business deductions there as well.

He then had me set up a C-corp where it manages the business finances such as medical, home office, and car reimbursement.

 

I am starting to think that this tax person created a lot of complexity with the C-corp with absolutely no benefit.

Although this year and next year I opted to pay my fiancé a small salary to help manage my business out of the C-corp.  She is a student and gets some very nice deductions.  By going through the C-corp I did not have to think about 401K contributions for her.  She did max out her traditional IRA, and in her last year looking to rollover all her IRA’s into a Roth and pay what looks like $0 in taxes.

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I wouldn't be able to comment on whether you have no benefit from the complexity without knowing a lot more about your situation. It's easy for me to be an armchair quarterback and there are surely issues that I'm not privy to (such as the numbers  )

[EnjoyIt]

Johanna Turner wrote:

@EnjoyIt – I apologize for overlooking your list.

1) You would need to hire your spouse for group health insurance (some insurers do this) in a sole proprietorship. In an S-corp or LLC, you, as >2% owner would include the cost of health insurance in your W2, which would then be deducted on page 1 of your form 1040, so it’s a wash. In a PSC, you would be treated as any other employee (non-reportable health insurance benefits).

2) Not true. In fact, there are limitations on self-rentals in an S-corp. A sole proprietorship is the best form for deducting home office expenses. That said, I have yet to see that you are better off using the $5/foot shortcut unless it is a very small office in a relatively inexpensive house.

3) If you have a home office and pay to park elsewhere (not as an employee but for work as a contractor), you can deduct parking, tolls, public transit, etc. as a sole proprietor. As an employee of your corporation, you can do the same, but I recommend an accountable plan.

4) Yes, you can establish a DB plan as a sole proprietor.

The medicare tax may be the main tax benefit but the reason for setting up a corp or LLC is not mainly for tax savings but other intangible benefits, such as protection. Having a separate entity makes it far easier to transfer part of your business to partners, too. Hope this helps.

Click to expand...

This helps a whole lot.

My tax guy has me set up in two corporations

The PLLC taxed as an S-corp which takes in all income and pays a salary to me as well as 401K contributions.  There are business deductions there as well.

He then had me set up a C-corp where it manages the business finances such as medical, home office, and car reimbursement.

 

I am starting to think that this tax person created a lot of complexity with the C-corp with absolutely no benefit.

Although this year and next year I opted to pay my fiancé a small salary to help manage my business out of the C-corp.  She is a student and gets some very nice deductions.  By going through the C-corp I did not have to think about 401K contributions for her.  She did max out her traditional IRA, and in her last year looking to rollover all her IRA's into a Roth and pay what looks like $0 in taxes.

[jfoxcpacfp]

@EnjoyIt - I apologize for overlooking your list.

1) You would need to hire your spouse for group health insurance (some insurers do this) in a sole proprietorship. In an S-corp or LLC, you, as >2% owner would include the cost of health insurance in your W2, which would then be deducted on page 1 of your form 1040, so it's a wash. In a PSC, you would be treated as any other employee (non-reportable health insurance benefits).

2) Not true. In fact, there are limitations on self-rentals in an S-corp. A sole proprietorship is the best form for deducting home office expenses. That said, I have yet to see that you are better off using the $5/foot shortcut unless it is a very small office in a relatively inexpensive house.

3) If you have a home office and pay to park elsewhere (not as an employee but for work as a contractor), you can deduct parking, tolls, public transit, etc. as a sole proprietor. As an employee of your corporation, you can do the same, but I recommend an accountable plan.

4) Yes, you can establish a DB plan as a sole proprietor.

The medicare tax may be the main tax benefit but the reason for setting up a corp or LLC is not mainly for tax savings but other intangible benefits, such as protection. Having a separate entity makes it far easier to transfer part of your business to partners, too. Hope this helps.

[EnjoyIt]

Johanna,

Thanks for the clarification above.  Would you mind correcting some of my assumptions I brought up above.

This is a list of some other benefits I believe you get from an S-corp as opposed to a sole propietorship:

1) Paying for Healthcare expenses and Health insurance can only be done through a corporation.

2) Using the up to 300sqft at $5 per foot a month for simple home office deductions can only be done through a corporation.

3) Parking expenses at $255 a month only through corporations as well.

Am I being mislead?  Is the only benefit the medicare tax.

 

What about a defined benefit plan if interested in tax deferment above 53K in a 401K? Can that also be done as a sole proprietor?

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(deleted duplicate post)

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Slav4ikMD wrote:

Thanks Johanna, I will have to learn more about this.  I see what you are saying.  But given that my side business is likely to grow and W2 employed stuff may diminish a bit, I guess I will just keep things running as is for now.  It seems like with higher numbers for the 1099 income, it may start to make more sense.

Also my accountant said that with the way I do it, I am less likely to get audited, rather than with just taking significant deductions of the 1099 income – no idea if that is true.

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With all due respect to your accountant - and I mean that with all sincerity - I have found that some tax preparers overhype the "audit risk" because it's easier that way and they don't have to take much of a position. Not necessarily so in your case, but I've seen it a lot, particularly with the home office deduction. We have had one client audited on that for a significant deduction and we won.

[EnjoyIt]

Johanna Turner wrote:

@EnjoyIt – That’s a good article, but note that an LLC can pay for the same office retreat. In the beginning, at lower income levels (where @Slav4ikMD is now), an LLC may be better until biz is in the higher brackets. Then he needs to weigh the advantages and disadvantages. If you are paying $2k a year or more for tax prep, compliance, and payroll service and saving same on Medicare taxes, I’d recommend the LLC. It’s very difficult to overcome the argument that your salary should be lower than similar providers in your area when the business depends on you to survive, so you’re paying Medicare taxes on the bulk of the income, anyway. If he gets to, say, $600k revenues and has a PA working, then should be able to justify a salary that leaves some profits for distributions.

Johanna,

Thanks for the clarification.  Some other benefits I know of:

1) Paying for Healthcare expenses and Health insurance can only be done through a corporation.

2) Using the up to 300sqft at $5 per foot a month for simple home office deductions can only be done through a corporation.

3) Parking expenses at $255 a month only through corporations as well.

Am I being mislead?  Is the only benefit the medicare tax.

 

What about a defined benefit plan if interested in tax deferment above 53K in a 401K? Can that also be done as a sole proprietor?

[EnjoyIt]

Duplicate

[EnjoyIt]

duplicate

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@docnews - you're welcome. I think you are making my argument. If the business doesn't have a lot of assets, then that is all that is exposed to loss in the event someone successfully sues the business. Yes, you can cover (probably) all with an umbrella policy, but an LLC is very cheap insurance in the event expectations do not equal reality. On the outside of your business, your umbrella policy can pick where liability insurance stops. I find myself in the position of arguing for the unlikely event of catastrophe, which I think our industry overthinks in many instances. Plus, odds are you'll never need that umbrella policy. However, I get paid for asking "what if?" - hope this helps.

 

@docnews - I did not address your question about living in a different state. If you moved to TN, you would have Franchise and Excise taxes on your business, which would NOT save you $. BUT, you would not be taxed on personal income and that is where the savings would come in. (Nevada, South Dakota, Washington, and Wyoming do not have any tax on corps.

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EnjoyIt wrote:

Two big savings I see with S-corps

save in medicare tax, and allow for 1 corporate retreat a year.  Allows for you and your employees (you) to go on a business retreat to a destination and discuss business.

http://www.wsj.com/articles/SB10001424052748704131404575117661962497090

nothing like going to Vegas or Aspen for a week at 39.6% off

 

Click to expand...

That's a good article, but note that you can have the same office retreat (if you are so inclined) under an LLC. In the beginning, at lower income levels (where you are now), an LLC may be better until you are in the higher brackets. Then you need to weigh the advantages and disadvantages. If you are paying $2k a year or more for tax prep, compliance, and payroll service and saving same on Medicare taxes, and have no other employees, I'd recommend the LLC.

[EnjoyIt]

Johanna,

Thanks for the clarification.  Some other benefits I know of:

1) Paying for Healthcare expenses and Health insurance can only be done through a corporation.

2) Using the up to 300sqft at $5 per foot a month for simple home office deductions can only be done through a corporation.

3) Parking expenses at $255 a month only through corporations as well.

Am I being mislead?  Is the only benefit the medicare tax.

 

What about a defined benefit plan if interested in tax deferment above 53K in a 401K? Can that also be done as a sole proprietor?

[jfoxcpacfp]

(deleted due to duplicate posts)

[jfoxcpacfp]

@EnjoyIt - That's a good article, but note that an LLC can pay for the same office retreat. In the beginning, at lower income levels (where @Slav4ikMD is now), an LLC may be better until biz is in the higher brackets. Then he needs to weigh the advantages and disadvantages. If you are paying $2k a year or more for tax prep, compliance, and payroll service and saving same on Medicare taxes, I'd recommend the LLC. It's very difficult to overcome the argument that your salary should be lower than similar providers in your area when the business depends on you to survive, so you're paying Medicare taxes on the bulk of the income, anyway. If he gets to, say, $600k revenues and has a PA working, then should be able to justify a salary that leaves some profits for distributions.

[EnjoyIt]

Two big savings I see with S-corps

save in medicare tax, and allow for 1 corporate retreat a year.  Allows for you and your employees (you) to go on a business retreat to a destination and discuss business.

http://www.wsj.com/articles/SB10001424052748704131404575117661962497090

nothing like going to Vegas or Aspen for a week at 39.6% off