When tax time comes around, are you being reactive or proactive? Do you find yourself swimming in a sea of questions? Like, is it better to do my tax return cheaply? How do I know if I’m doing them the right way? Welcome to The Tax Answers Advisor with Marcelino Dodge. Today we’ll answer these questions and many more, sharpen your pencils and take some notes. Now here is your host, Marcelino Dodge.
Marcelino: Welcome to The Tax Answers Advisor. I am Marcelino Dodge, Enrolled Agent with the Internal Revenue Service. My thought for this week is, “People try to live within their income so they can afford to pay taxes to a government that can’t live within its income.” Isn’t that so true? Trillions of dollars of debt, and it seems like there is no light at the end of that tunnel. But yet, we as individuals are always needing to live or should we say required or is sometimes demanded that we live within our means.
But as we know, the government can’t live within its income. Yes, and I want to thank all those listening to this podcast around the world here in the United States, and other areas like China and Ireland, it’s truly grateful and thankful that the fact you listen and you take in this wonderful information, I think it’s wonderful because it is exciting to be able to help people in making good choices when it comes to their federal income tax here in the United States and their communications with the Internal Revenue Service.
And you can always reach me, Marcelino Dodge at cashtracksfinancial.com, it’s my website or you can email at firstname.lastname@example.org, or you can give me a call, it’s 844-394-4287. A few updates and reminders as January 1st is getting ever closer and coming around the corner here is we’re going to get ready to start preparing tax returns. In this current pandemic environment with a lot of changes and updates course, we got many who got their economic income, it can economic impact payment, or EIP payment, which is actually an advanced credit on the 2020 tax return.
Now, it’s going to be important when you bring your information in to your tax preparer, or let us know here that exactly how much of that credit did you receive, because that has to be reconciled on the federal tax return. And some individuals, and I have some clients in this situation whose income from 2018, while 2019 was such that they ended up actually getting their payment either eliminated or reduced their economic impact payment. But when we go back to reconcile that in 2020, for 2020, they may actually get some of that payment now because their income in the year 2020 declined.
And thus they may get if they only got a partial payment, they’re going to get the difference between like say if they got 700. And instead of 1200, they could very well get the additional $500 credit. And the same is true across the board with a lot of individuals. Now on the other side of that though, if your income in 2020 actually increased and for some individuals it did, which means you may not have gotten an impact payment, or maybe you’re above that threshold on the income level. Well, if you happen to get overpaid, well, that’s no big deal because no repayment of that credit will be required. So that’s a true good part about that.
Another good part about that payment is the fact that you don’t have to pay it back which is very seldom happens with the IRS when you get money like that. But this is one case where you definitely get that back, or you definitely do not have to pay it back. Now, some people may have gotten some payments from the IRS when it comes to various refunds throughout the year. Maybe they file for prior years and they got some refunds back.
Keep in mind, that even the IRS will send you a 1099 INT, which is for interest that the IRS paid you because yes, if you got a refund late for 2020. Or if you got in 2020 a refund for a prior year like, 2019, or 2018, or 18, or 17, I should say. If you get that refund paid in 2020, you filed late and got your refund, well, you will get some interest. Now you have to then turn around and pay tax on that interest.
So just be aware of that, that you’re going to, if you got especially more than $10 of interest on your payment on the refund you received from the IRS, you will get a 1099 interest statement from them. Also, of course, we keep in mind we remind everybody about their $300 cash charitable deduction, that’s per return. So you’re going to be able to claim that above the line, which is very nice deduction, not much, but as they say, something is better than nothing.
Also, because of the many changes we had this year, and with the pandemic still raging on, here at Cash Tracks Financial, as we work to help people in planning and working on their tax returns and helping them year round with all of their various financial needs. We’re taking up some extra precautions this year. With the COVID, we’re going to be encouraging ones to use e signature options which can which was before engagement letters, and especially for signatures on tax returns, those are going to be important.
And there’s some authentications that we have in place for security because of the information that is on those documents and new sent in for signature. So there’s, we’re going to have those extra precautions in line. Also, online payments are definitely going to be an option that ones can use to be able to pay for their tax return when they come in, because there’s a payment button right on our website, document upload.
This is really nice, because no matter where you live in the country, we can help you and we want to help you to do your taxes and to do them accurately and right. And then not only that, but help you to have some good solutions and goals so that you can maximize no matter what Congress does, maximize your tax situation. And we also provide electric, we’ll be providing electronic copies of your taxes. So essentially, which is really nice here, we can have nice online appointments, you can upload your documents to us, upload your identification documents, as well, all of that, of course, will be required.
But yet, you never have to come to the office, we can handle it through a very nice online appointment through our Zoom account, which will make it very easy to be able to do our whole solutions management, which is what we’re really encouraging ones to do. Because we all have goals. And sometimes it’s in starting a business like we’re talking about. And throughout today about being an S-Corp, is that going to be the best option for your business?
And part of our intelligence solutions management is for ones who are looking to start a business or maybe you’re in business and have been in business a while. Maybe you’re a partnership, or you’re an LLC, or even a C Corp. Whatever the case, your small business may be through our intelligence solutions process, one of the potentials for that is to determine. Are you being taxed as the type of entity that you should be taxed as. And so we work to help maximize those efforts.
Now, as we’re going to look at the possibility of you being an S Corp. And that comes in because we look at the goals, what kind of goals, because there’s a lot of solutions out there, we want to look at your goals, help you to establish goals for you personally, help to know what your goals are business wise. We know there’s a lot of challenges out there for individuals in business because of various government requirements, government shutdowns, and so on.
Yet, we still need to have goals of where we want to go. Maybe we’re going to be starting a new online business, for example, or do something through e commerce, which we’re going to discuss that actually more in detail next week. But yet, even with those you got to think about what type of entity am I going to be, in regards to those type of goals with my business? So as we gather this data, and we look at your data for your business and personal finances, we create an action plan.
Looking at, okay, is the type of entity for me going to be the right one? Maybe an S-Corp because of some of the advantages within that will be. And so as we look at these top priority items, and work year-round, see we just don’t get you started in it but we work with you year-round we make sure all of your compliance needs are met. And so within one nice package, we take care of all of your tax return needs which would include not only the S-Corp tax return, as a business tax return, we keep in mind that that information is we’ll talk about in a little bit more that in the S-Corp really does not pay taxes.
It’s income and losses go down to the shareholders of that, which in many people that I work with are very few shareholders can be one shareholder of an S-Corp could be two shareholders, whatever that number may be. But that all flows down to them. And we make sure all of that tax is taken care of for you. And as you get access to us throughout the year, to be able to handle those needs, we can package in with that maybe some accounting, and just really, really depends what your needs are.
And of course, payroll can be worked in there as well. And that, of course, we keep in mind, and we’re very upfront with all of it, all of our bundles, because we got a personal bundle starting at $49 a month, and a business bundle that starts at $149 a month. Because everybody’s needs are different, which is why we have an initial meeting upfront, which is no cost, no obligation meeting, we can meet and discuss over Zoom, we can set an appointment, you can set an appointment up for this exploration meeting, at cashtracksfinancial.com.
Or, of course, you can email me at email@example.com, or even call it’s 844-394-4287. So yes, as we’ve mentioned, here, our solutions process leads us to one of the one potential conclusion that is good for you, as we build the action plan could be being an S-Corp for your business. Now, what does it take to be an S-Corporation? And why would we potentially want to do one? Well, we got to stop and look at once again, the bigger picture, look at your whole picture of you as an individual, you as a family, look at the income.
I mean, if there’s a two income in the family, a husband and a wife and a family, perhaps both of them are working and you’re wanting to start a business. Or maybe you’re taking money out which some people will do this, they’ll take money out of their retirement plans, the 401k or maybe they have an IRA, they’re going to take some money out to perhaps start a some type of business. And so that’s where our process comes in to help look at what your tax bracket is.
Because sometimes when you take money out of an IRA, to go and start a business that perhaps we’re going to form as an S Corporation. Your tax bracket may change for that year. And so, then we got to look out here are you going to be for this year, are you going to be for next year. Also, as we go into this new year with a potentially new Presidential Administration that’s made some indications that they may withdraw some of the tax cuts from Tax Cuts and JOBS Act, which could actually raise taxes on everyone in small businesses are included in that with some of the information that I have seen.
So, we got to think about those things as well. But yeah, we can plan based on current law then we can adjust. And so we keep in mind also, that as an S-Corp as we look at that potential ability reminding the individual as we look to do that is you got to operate like a business, which means keeping separate accounts, having a personal account and having an individual. A personal account for personal items. And then the corporate account for all of the corporate information, all the corporate statements, and only be paying corporate bills out of the corporate checking account.
And that’s where we’ll be able to easily recognize income, and then be able to figure out that deduction of expenses, and be able to constantly do what needs to be done there. Well, we got to keep in mind, though, as we look at this is also about when we make the election to be one because you just don’t can’t be a sound to be an S-Corp. Now there’s actually filings that have to be done with the IRS. And these filings need to be done in a timely manner.
Which basically what that means is that like, for example, I actually have some businesses I’m working with right now. That beginning January 1 of 2021, they’re starting a new business, they’re going to be in their filing to be an S-Corp beginning January 1 of 2021. They happen to be ahead of the ballgame, which is really good. We did some good planning was able to get that all handled.
But in actuality, they have until March 15th of 2021 to make the election. Now, if by chance a business misses that filing date, in this case. There are, and I’ve done this a few times as well. There’s options to make a late election to do that. It’s a paper cover, cumbersome process, but yet it can be done. I’ve done it and you can go so say if, for example if you for whatever reason you said I’m going to be an S-Corp for 2021. But oh, wait a minute, it’s June.
I forgot to get the election filed. And so, I’m gonna end up being a C-Corp for the whole year. Well, there’s ways we can go in through late election process that will allow you as a business owner, to make that election all the way back to January 1st of 2021. So that you get the S-Corp status for the whole year. Now we keep in mind, two of those who are eligible to make this election to be an S Corporation.
Of course, when you sign up in your local state, you may decide to be a corporation in your state, which makes you by default with the IRS when you go and get your employer ID number that makes you by default, a C-Corporation. And which then means you got to turn around and then file the election with the IRS. And we help you to do that we help you to make that election with the IRS so that you’ll be an S-Corp. And then for that time, going forward, you’ll be an S Corp.
Now, another option that oftentimes which I see a lot of people doing now, because it’s usually an easier entity to form, and there’s some easier filings, and some less stringent requirements at various state levels. And some of these do vary by state, is you have a multi-person LLC, which is an LLC that has two or more members, which oftentimes that can be husband and wife can be maybe partners in a partnership that decide, you know, we don’t want to be a partnership anymore, we want to be an LLC.
Well, but the challenge with an LLC, which too many people overlook, is the fact that when you do an LLC, you’re by default, with the IRS for tax purposes, you are considered a partnership, and you’re taxed as a partnership. While many times when people do this, they’re thinking, Okay, well, I want to be an employee, I want to be on the payroll and so on. Well, if you stay just the LLC, under the default, you can’t do that, because you’re taxed as a partnership.
That’s why with many the LLC is I work with, that have two or more members, we elect to be an S-Corporation that way, the members of the LLC can then be on payroll. And that just shows up on the tax return as being compensation to officers what they get paid. So that’s a very nice and it brings in some nice tax consequences, and tax benefits to ones that are able to do this and the ones that we do this with which is why we recommend it and do it quite often.
And it’s worked out very well for the small businesses that I work with on a regular basis to be able to do that. And that’s part of our mutual exploration process. When we do that these are things that we go in and we figure out and as we put our action plan into place with you, these are decisions that are made. And so we’re going to go into a little bit more about how we qualify to be an S-Corp and even some of the advantages here. When we return in a couple minutes. This is Marcelino Dodge on The Tax Answers Advisor on The Voice America Business Channel.
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Today’s tax and financial environment is constantly changing. Tax laws change rapidly. The traditional reactive approach to tax preparation and taxes no longer works. To deliver the best possible outcomes in today’s world. You need a year-round approach to take advantage of tax law changes and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year to limit his client’s tax liability plus with this year-round approach clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at firstname.lastname@example.org or call 844-394-4287.
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Voice America Business Network. The bottom line in business.
This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to success2cashtracksfinancial.com. Now, back to The Tax Answers Advisor.
Marcelino: Welcome back to The Tax Answers Advisor. This is Marcelino Dodge, I appreciate you listening to the program today as we’re discussing about S-Corporations. And is that a good idea for you and your business to do? Well, that’s part of why we meet with people and have exploration sessions with individuals is to discuss, “Is an S-Corporation a good idea for your business?” Well, how do we qualify to be an S-Corp?
Because we’ve talked about how it could be some of the advantages, we’re going to get into more advantages here shortly. But how can you even qualify to be an S-Corporation? Well, we got to keep in mind that if we’re going to have an S-Corporation, we were limited to 100. shareholders and along with that one family member, family members are usually treated as one shareholder within an S-Corporation.
And for the people that we work with. We usually work with very small number of shareholders. We can work with larger ones but, we have much more experience in working with just a few shareholders an S-Corp, and truly working with small business people who are running a very nice business and want to make some money and want to be able to also take advantage of many tax advantages that there are that you have as being an S-Corp.
I mentioned in the last segment about filing the election to do so, whether you’re an S, whether you’re a C-Corporation, or a partnership or a multi-person LLC. If you want to be taxed as an S-Corporation, all the shareholders of a C-Corp must agree to the election, or all of the members or partners on a partnership or an LLC, all of them must also consent to this election. Because, the election that is made, the form that is used to file the election has spots for the information on all of the members or members shareholders where their information is listed, and then where each of them need to sign in consent of that.
Also, the next part is keeping in mind, to be an S-Corporation is that only one class of stock is allowed in an S-Corporation. So unlike C-Corp, that’s a publicly traded companies that have what’s called common stock and preferred stock. S-Corps only have one class of stock that is period because if something changes, or if there’s some unusual happenings, which I’ve heard stories where individuals sometimes go and sell certain things, or make certain moves within the company that changes from a welding hat, from having only one class of stock to maybe two classes of stock, which then moves him out of even being an S-Corporation.
So that’s where we’re very cautious. And being very careful when taking actions when you’re being taxed as an S-Corporation is very necessary. Also to classify as an S corporation, it must be a Domestic Corporation. Here within the continental United States, within the United States, individual shareholders must be US citizens or residents. And this is where individuals can get into difficulties that if they sell their stock in an S-Corp, to someone who lives in England, for example, that could take that S Corp.
And it could no longer be an S-Corp, because that’s non-resident shareholder, which is not allowed is an S-Corp. So make sure all of all of the shareholders are US citizens or residents. And as I mentioned about the election, you got to make the election by if you wanted at the beginning of the year, like January 1st, you got to make the election by March 15th. And there is a time period. It’s three months. Well, it’s the 15th day, the third month, which is March 15th.
Now the vast majority, very vast majority, of S-Corporations are going to be calendar year taxpayers. There’s very, very few that are fiscal year, which means they have a 12-month period that is other than the calendar year. Very, very few are that way. And there’s just some very few exceptions that are allowed. But in general, vast majority of S Corps are all going to be a calendar year, which means you got to make the election by March 15th of the year that you want to become an S Corp.
Now as I mentioned. Also there are allowances for late election filings, procedures that are out there, which we can certainly help with, if that does come up, but the idea is to just get the election done on time, which is really nice, because one thing that has worked well over the years, and even in now that things are kind of getting a little bit back going again with the COVID situation is faxing to the IRS.
Because you couldn’t fax anything a while back, but some of their fax numbers are start working and usually faxing in such elections can be very effective. As we’re going through this, we want to keep in mind and look at why would I want to be an S-Corporation? What are going to be the advantages to me of being an S-Corp? Well, one advantage, I should say the first one is that as a shareholder of an S-Corporation, you take a distribution of profits, you’re only going to pay while there’s only going to be tax paid on those profits once.
Yes, and that’s because you as a shareholder, the profits that flow through because the tax isn’t paid at the corporate level, it’s paid at the individual level. So if you as a shareholder, take a distribution of say $5,000 of profits, your share of the profits from the S-Corporation, the corporation isn’t going to pay tax on that 5000, you’re going to pay tax on that 5000 of course. With an S Corp, you take you pay tax on that 5000 rect, whether you actually take the distribution of that 5000 or not.
If you leave that 5000 in, you’re still gonna pay tax on it. But you’re also going to raise your basis, which I haven’t talked too much about basis yet. I’m not sure how much I’m going to talk about that today. But you do have basis in your stock in the S-Corporation. And by leaving the profits in and paying tax on those profits, you actually raise that basis in the business, but many S-Corp shareholders will take the distribution of their profits at the same year that they’re being taxed on them.
So, now that’s where as compared to like if you have a C-Corporation, for example, which doesn’t just which pays tax at the corporate level, so that 5000 level, the C-Corp will pay tax on that 5000 at the corporate level. And then if you take a distribution of dividends, which there’s a whole another filing for that, you’re taking dividends out while then you’re gonna pay taxes on that because the corporation is then turn around and issue out a 1099 to you for taking a distribution of those dividends.
So that’s one of the advantages of the S-Corp, is not subject to double taxation. And I’ve been touching on this some already, is a fact income and loss out of the S-Corporation. So you have an S corporation that makes $50,000, for example, it has five shareholders and each of them have an equal share. Well, each of those shareholders would then have income that would flow through to their individual tax returns of $10,000 that they would pay tax on.
And that would be, they would pay that though, regardless of whether they actually took that $10,000 distribution out or if they just left the 10,000 in and each shareholder could do a different, make a different choice. Once you’re older could say okay, I’d like to have my $10,000 profits distributed to me, and they’ll take it. Another shareholder may say no leave my 10,000, so I want that basis in there. Now, a good reason to have to leave profits in is when there is a loss, because sometimes an S-Corporation will have losses.
And when it does have losses, those losses do flow through to the shareholders. Now the individual shareholders though, they may or may not be able to take that loss as a deduction on their tax return. And the reason I say may or may not, is because it mentions it comes to what I mentioned a little bit earlier about their basis that they have in the S-Corporation. So they say, if they have say they get $5,000 loss flow through to them. In order to take that $5,000 loss as a deduction on their tax return, they have to have at least $5,000 basis to ops in there in the S-Corporation to be able to do that. So then, if they take that then that $5,000 loss with a $5,000 basis, then their basis would be zero. Going into the next year. It gets there’s a whole little we do calculations and everything to make sure but what it comes down to is that if you have like a $5,000 loss that flows through to you and say you don’t your basis, though, is only like 2000.
Well, then you’ll be able to take $2,000 of deduction, but then you’re going to have a $3,000 in that case. That will then carry over into the next year until you have basis built back up by perhaps profits or additional contributions you make into the S-Corporation. As a shareholder, you perhaps add to your basis by contributing some capital into the business. So, that’s just something to keep in mind as well basis is important in an S-Corp.
The pass through profits, which is this where one of the advantages comes of being an S-Corp as compared to being taxed as a partnership, is that you get $10,000 passed through to you as a shareholder in an S-Corp, you’re not going to pay self-employment tax on that. That same $10,000 if you’re taxed as a partnership, is going to be subject to self-employment tax. So you save on that as well by being an S Corp.
Capital gains and losses. When an S-Corporation sells some equipment or property or some type of capital gain type of area where they are, and there’s a capital gain on it. So it had a, like some property that the S-Corp bought for 20,000, then they turn around and sell that property for 50,000. Well, that capital gain on that whatever your share is of that 30,000, then comes allocated to you as a flow through capital gain.
And the same would be true as losses, if they bought that for 20,000, that investment property for 20,000 and sold it for only 10. Whatever your share of that loss is once again, flows through to you as the shareholder that you come back and claim on your personal tax return. Now, this is an area’s I want to talk to with shareholders, this is a very touchy area with some individuals in S-Corporations. Yes, this is where there’s been some abuse is that some individuals take as minimal salary as they can.
But they take out huge distributions, well, they’re back can actually draw attention to the IRS because they expect you as a shareholder within a corporation, S-Corporation. If you’re working in that Corporation, regularly doing business as say, a manager or some type of individual in there, they expect you to take a reasonable salary for your services to the S-Corporation. So if you’re doing a position that perhaps a person in another area would make, say $75,000 for, but you’re only paying yourself like $25,000 for, that can draw attention.
So, you need to have a reasonable salary based on your position within the S-Corporation. Because you don’t want that IRS audit coming in. And that’s usually what will draw it is if they see Oh, wow, look at this person took had his officer at $25,000 a salary, but yet he took $125,000 of distributions. Because all of that is reported with the S-Corporation tax return, because there’s a little line that says distributions that this taxpayer took.
And of course, and they got the W-2 reporting. And they also got the line that says compensation to officers on there, as well. So it’s important that you pay yourself a reasonable salary. Now the other part on an individual basis, you want to pay yourself a reasonable salary anyway, because you want to make those contributions into Social Security. You don’t want to minimize those contributions. You want to maximize those.
So you want to pay yourself a good salary, so that your average wages for the purpose of calculating Social Security is at a good level. So it’s very important to take a reasonable salary. Another reason to perhaps be an S-Corp is that there’s unlimited life to an S-Corp. And you can also easily sell the shares to other people. Although most of the time what I have seen in this case is people usually don’t actually sell their shares to the S-Corp because a lot of the small business people I work with, they actually end up selling more of the assets of the corporation.
And if you’re looking to buy usually, that’s the better idea to do is to buy the assets that and set up your own S-Corp if that’s what you’re wanting to do, at least that’s my recommendation because then you start a new with various deductions such as depreciation, because we just buy shares into it. If you’re looking to start, then some stuff may already depreciate, be depreciated out so that’s are all areas that we stop and we look at when we try to help ones to make good decisions and we set their goals and put together their action plan as part of our intelligence solutions.
Also, profits from an S-Corporation are not subject to the net investment income tax, which is a very important consideration also reduces taxes there. French benefits for the employees of the corporation are not considered income to the employees. And when you painting that’s, of course, if you pay like health insurance for the employees, if you do a retirement plan like a 401k, a SEP IRA, or a simple IRA, as we set those up those benefits for your employees, those aren’t all deductible to the corporation.
Now, the shareholders are 2% more shareholders, they can deduct health premiums. Because those premiums can be paid by the Corporation, there can be like an HRA or a section 105 plan that the corporation does, but the shareholders who are 2% or more, those are for health insurance premium in particular, that can be paid by the Corporation. But then, that in the case of the shareholder owner there, those are then added actually back to the W-2 of the of the shareholder.
But then, you can turn around and then back those back out by taking the self-employed health insurance deductions, basically, it ends up being a wash, and you have the corporation paying for your health insurance. And you can even have a section 105 plan within the corporation, the S-Corp so that you can also have the corporation do reimbursement plan for you, as a shareholder once again, though, it’s deductible to the corporation.
But, it does add back into your income as a shareholder. But it’s still very handy, something I personally use and it’s just worked out very, very well. For me and something one of the areas also that I work with, to help you to maximize deductions as a shareholder in an S-Corporation when we go through your action planning, and your business planning. And then under current law, and hopefully this will stay in place is the eligible for the qualified business income deduction which is 20% of your profits, which that then comes off of your, that’s calculated on your personal return, that you get that deduction for your profits that flow through from your S-Corporation.
So very nice, and very nice advantages we’ve touched on there for your S-Corporation. We’ll cover a few of the disadvantages of being an S-Cor,p when we return from this message on the Voice America Business Channel. This is Marcelino Dodge on The Tax Answers Advisor.
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Today’s tax and financial environment is constantly changing. Tax laws change rapidly. The traditional reactive approach to tax preparation and taxes no longer works. To deliver the best possible outcomes in today’s world.
You need a year-round approach to take advantage of tax law changes and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year to limit his client’s tax liability. Plus, with this year-round approach, clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at email@example.com or call 844-394-4287.
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This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today please call in the number is 1-866-472-5790. That’s 1-864-472-5790. You may also send an email to firstname.lastname@example.org. Now, back to The Tax Answers Advisor.
Marcelino: Hello, certainly appreciate you still listening in on this program, The Tax Answers Advisor. I am Marcelino Dodge, discussing today about being an S-Corporation, Is that a good choice for your business? Well, that’s certainly something I can’t answer without sitting down and visiting with you through a nice Zoom meeting, being able to look at your goals, examine where you want to go, and just kind of get to know you there. So we can really come up with, with what is the best entity for you.
And today, as we look at S-Corp, we’ve talked about what it takes to be an S-Corp, some of the advantages of being an S-Corporation. There’s a few disadvantages to being an S-Corporation. And we’re going to go ahead and just review some of those at this point, just to kind of give you an idea of why you may not want to be, but it really depends on everybody’s individual circumstance. That’s how I look at it, we just can’t say that it’s one size fits all.
It’s just based on your individual needs, your individual goals, what your business goals are going to be. Now, as you look at S-Corp disadvantages, for some who are really looking to do, maybe perhaps a lot of shareholders, especially if you’re looking to do more than 100 shareholders, the S-Corporation option is not for you, you want to look at another type of entity. Also, the types of shareholders in an S-Corporation.
You cannot have, as I mentioned earlier, you can’t have non-resident citizen, not non-resident aliens, have as owners of a shareholder. Basically, you can’t have someone that’s living outside of the United States as an immigrant outside, like say someone that’s a resident of Brazil or Mexico or China or whatever. One of those residents there, they have to be a resident, legal resident immigrant, to be able to be a shareholder and an S-Corp.
So but they got to be here to do that. Also, an S-Corp cannot have an IRA, as a shareholder, cannot have a C-Corp or a partnership as a shareholder. Basically, it needs to be a live warm body that is either a citizen of the US, or a resident alien in the United States to do that. So just keep those points in mind, which, for the most of the people we work with none of those issues. None of those are really issues, because I’m dealing because I deal with so many individuals, small companies, versus two or three individuals, maybe four or five in a town, they’re just wanting to get their business going and operate. So usually, that’s not a big issue. Also, there’s certain types of estates that may be eligible to do and be the shareholder of an S-Corp. But it’s really going to be case by case type of basis that we got to very, very careful of there when we look at that.
Another disadvantage of being an S-Corp is only one class of stock, as I mentioned earlier, so you got to make sure if you’re going to be an S-Corp, that certain stock moves that are done in like a C-Corporation are not done in an S-Corp, because you just don’t not want to create a separate class or a second class of stock, which certain moves can make that happen. So it’s just best to keep it simple. Always just stick with one class because you don’t want to accidentally create another class of stock, which can’t happen there.
So you don’t want to definitely be doing that. Also some states and this carries by states. I mean, I don’t know of any states personally, but this is where part of our research in deciding if this entity would be good for you is to see whether your state recognizes S-Corporations we want to be, make sure we’re accurate on that. Also, I’ve talked about basis, like say, if you have a loan, as a shareholder, you don’t gain basis in the S Corp.
If you assume a loan from the S-Corp, the only way that can happen unless it’s a direct loan to the S-Corp. So basically, just to kind of keep in mind, just have a loan that the S-Corp takes directly out and let the S-Corp pay it, let’s just put it like that. That’s just the simple way to do that. And that not even mess with that. It just kind of keep out of that. Also tax paid on the profits by the shareholders. That’s regardless if the income is distributed or not.
So and I mentioned that a little bit earlier, too. So you have an S Corp that makes $50,000 profit, you as a shareholder have, you there’s five shareholders each of you get a $10,000 flow through. If you don’t take that $10,000, you pay tax on it anyway. So that’s just a pretty simple straightforward part of that. So, sometimes shareholders need to take the funds out, and they do others don’t take the distribution.
So what we got to keep in mind is that you just pay the tax, regardless of whether you take it or not. And some individuals feel like, you know, I’m paying the tax on I’m gonna take, and others feel like, I’m gonna pay the tax on it, I’m not gonna take it. So it’s up to you individually there. But just keep in mind that you do pay those taxes. Also, you must generally use a calendar year, and I’ve touched on this also earlier, is that very, very few.
And right now, I only know one that I’ve ever dealt with, that is actually on a fiscal year, which once again, is a 12-month period that is other than a calendar year basically. And they must generally use a calendar year so January through December, is how as corporations, it’s usually good to keep it that way just be simple so that you’re not having to mess with kind of how to use tax returns that. For example, like this year I got an actually fiscal year S-Corp. I’m gonna be starting on that actually, is ending ended in 2020, but we’re gonna have to use a 2 2019 tax return, the 1120 as tax return because that S-Corporation began in 2019 as far as that’s when their tax year began.
So, then all my others S-Corps are going to be 2020 tax returns as I go into those for this year. Now, some of that sometimes hits with S-Corporations, this can only happen if an S-Corp had converted from a C-Corp, or had been a C Corp for several years. And this can happen particularly within the first five years of converting from a C-Corp, to an S-Corp is called Built-in Gains Tax. Which is just a tax, which is one of the tax one of the few taxes, that is paid at the corporate level of an S-Corporation.
So, if you do convert which was we visit with people and we look at them, they’ve been maybe they’ve been a C-Corp for several years. As I sit down and visit with you, we go over our exploration time. This is one of the areas that can be discussed brought up during that time, is, I’d have a C-Corp, I got these assets in it. These assets have appreciated because I’ve done some depreciation and maybe just markets as videos you got building goes on, these assets could have appreciated.
And but I’m planning on selling them within like the next two, three years. Well, in that case, we’re looking at your C-Corp, if you are looking at doing that, then turning to an S-Corp may not be in your best interest, it may actually cost you taxes because of the S Corp Built-in Gains Tax. So basically, if you’re going to convert from a C-Corp, to an S-Corp, it’s usually good to keep in mind that you usually don’t want to be selling certain assets within the first five years of becoming an S-Corp.
So that, you don’t pay this Built-in Gains Tax, which actually is a tax paid at the S-Corp level. And these are some of the disadvantages of being an S Corp. But at least from my perspective, in working with the S-Corporations, I have the individuals that usually need look at being an S-Corp. The advantages far outweigh the disadvantages, because many of the disadvantages that I’ve gone over, are usually not going to be an issue, especially for a company that’s looking at having maybe three, maybe four shareholders at the most, and having a few employees in their business, maybe 10 or 20.
Usually those disadvantages just don’t come in. And don’t even arise because you got a company that’s just wanting to build a business and have some legal protections. As long as they keep everything separate, they can get some of the advantages of coming to the escort such as avoiding the double taxation. And also being able to have some of the other wonderful benefits that come in is being a shareholder in it, which one of the nice benefits of being an S-Corp is your contribution plans to like a 401k within the business or a simple IRA within the business is that you can as being an employee, of your corporation, your S-Corporation, you have your reasonable salary that you take, which as a shareholder that’s actively working in the business.
You want to make sure you are taking a reasonable salary. But yet, what you can do is you can have like a simple IRA, or 401k whatever you like in there, and just maximize those contributions into that. And the advantage of that is, is that you’re getting a deduction to the business. You’re paying into your Social Security and Medicare. But yet, you are buying them out, you’re putting into your 401k, or your simple IRA.
Maximizing those out is absolutely what you can. You’re getting those max deductions which are also deductible to the business. Plus, what you also have coming in there then is the matching amount that the business does. So that’s a big advantage to you as a shareholder. In doing that is to be able to maximize those contributions and getting both your contribution as employee and then the matching amount that the business does all in all those, of course being deductible to the business.
And as we discussed this, about an S-Corporation, we certainly keep in mind that this is just one of the potential goals and solutions that we have. And we sit and we visit with you, and look at what best solution is for you in according to your goals. We create an action plan, helping you to develop your business. And as we develop your plan and look at your business where you want to go. One of the potential options is being an S-Corp.
Now we can also have it where we start as perhaps a sole-proprietorship. And then as you go along a year or two down the road, okay, then now, maybe as part of our action plan is time to incorporate and be anS-Corp. And these are just all items that we discuss, we go over very, very carefully with you as part of our intelligence solutions option so that you get the best options for you personally, and for your business.
And keep in mind, you have any questions about today’s program, you can contact me at email@example.com, or you can give me a call. That is 844-394-4287. And this is Marcelino Dodge, I’m an Enrolled Agent with the IRS which helps me to take a look in because I do so much continuing education each year was just in a seminar a couple of weeks ago, getting ready for the upcoming tax season looking at individuals, looking at a business seminar next week as well.
That’s going to discuss items such as an S-Corps, C-Corps, partnerships, LLCs, all of these type of deals, which is why we sit down, we look at what is best for you as the individual what is best for your business as we work to strive to help you to reach your goals because as we have posted on our website, and as pretty much has become our model, we do not believe that financial success is just for the rich and the famous.
So we’re gonna look forward to talking to you again, next week on a very important topic that is this becoming more and more prevalent in today’s world, and which is actually COVID has contributed to this quite a bit is, “E-commerce and the virtual currency, the Bitcoin.” And so, we’re going to talk about those next week taxes in the internet economy. There’s a lot of areas in that, that is vital for you to understand if you’re dealing with these businesses, this business area.
And certainly yes, we can certainly help you to cross over those murky waters and be able to make sure your tax obligations are met if you’re involved in these areas. Certainly, thank you for listening today to The Tax Answers Advisor. I am Marcelino Dodge on The Voice America Business Channel.
Thank you for listening to The Tax Answers Advisor with host, Marcelino Dodge. We’ll be back again next Wednesday at 6pm Eastern Time and 3pm pacific time on The Voice America Business Channel. We’ll have more to share next week.