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Choice
of Entity--S Corp or LLC or ???
When starting
a new business or deciding whether to make a change regarding your current
business, the legal form in which you operate has both tax and non- tax
advantages (and disadvantages). Should one operate as an unincorporated
sole proprietorship, a partnership, a limited liability company, a regular
corporation or an S corporation?
Sole proprietorships are the easiest and
least expensive entity type to set up and can be operated with few
formalities. However, they offer no personal liability protection and do
not provide many of the tax benefits available to corporate employees.
Partnerships offer many of the same advantages and disadvantages as the
sole proprietorship; however, they allow the business to be owned and
operated by more than one person. Also, the liability issue can be overcome
by forming a limited partnership, but those partners whose liability is
limited cannot be involved in actively managing the business.
A newer and very popular entity type, known
as the limited liability company, offers what many see as the best
alternative for the typical small business. These entities can be set up to
be taxed as partnerships, thereby avoiding the corporate income tax, while
the members' personal assets remain fully protected from business
creditors. S corporations also offer liability protection, without a
separate corporate tax. Like partners and sole proprietors, however, more-
than-2% S corporation shareholders are ineligible for tax-favored fringe
benefits. Another potential drawback of S corporations results from the
limitations on the number and kind of permissible shareholders. These
restrictions can limit an S corporation's growth potential and access to
capital in some businesses. An S corporation, like an LLC and a sole
proprietorship (but unlike a C corporation) allows business losses to flow-
through to the owner's personal tax return and offset other sources of
income, with some limitations, thereby reducing personal income taxes.
As for "regular" corporations,
otherwise known as C corporations, they do not have the shareholder
restrictions that apply to S corporations, but they are potentially subject
to double taxation. That is, their profits are subject to income tax at the
corporate level, and are also taxed to the shareholders if distributed as
dividends. However, there are many stratagies available to substantially
limit the double tax. An advantage of this form of operation is that
shareholder-employees are entitled to tax-advantaged corporate-type fringe
benefits, such as medical coverage, disability insurance and group-term
life insurance. There are many tax and non-tax factors and issues to
consider, whether you are starting a business or considering a change of
entity type of your current business. One should carefully review all such
issues prior to making this decision--it is ofter difficult to
"undo" this choice without significant consequences.
Read more...
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Greetings!
Tax season is over--but tax planning never ceases!
Just some things to think about and, perhaps, act upon.
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· Charitable
Gifts of Appreciated Property
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 Tax complications,
apart from questions of proof, do not ordinarily arise when you make a
cash gift to a charity. However, complications can arise when you make a
gift of appreciated property. Appreciated property is property that has a
current fair market value that exceeds your tax basis in the property.
Tax basis is how you measure gain and loss and is usually the original
amount paid for the property. However, special basis rules apply for
inherited property, property acquired by gift and property for which
depreciation deductions are allowable.
Your
charitable deduction will depend on whether the appreciated property is
"ordinary income property" (e.g. inventory; capital asset, such
as stock, held less than one year) or "capital gain property".
In general, your charitable tax deduction for a contribution of ordinary
income property is limited to your basis. However, the tax deduction for
a contribution of capital gain property is generally (but not always!)
equal to its fair market value at the time of the contribution. For
example, your tax deduction may be limited based on the type of capital
gain property donated, the type of charitable organization involved, the
use of the property by the organization and/or your adjusted gross
income. Ideally, a contribution of appreciated property will afford you a
tax deduction for the fair market value of the asset contributed--without
ever paying tax on the appreciation. This is a far better result than
selling the asset at a gain, paying income tax on that gain and
contributing the remaining proceeds to the charity. Clearly, one must be
fully apprised of the complexities associated with charitable giving of
appreciated property to ensure the maximization of the tax benefits
available.
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· Sale of
Principal Residence
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Individuals may elect to exclude from income up to $250,000
of gain realized from the sale of a principal residence. For married
individuals, the maximum exclusion available is $500,000. The gain
exclusion is a powerful tax/retirement savings device in an environment
in which housing costs have substantially appeciated over the years. The
exclusion essentially allows you to withdraw the appreciation of your
home tax-free when you sell it.
In order
to be eligible for the exclusion, the individual must have owned and
occupied the home as a principal residence for at least two years of the
five year period that ends on the date of sale. Married couples may use
the $500,000 amount if: (1) either spouse meets the ownership test, (2)
both spouses meet the use test, (3) neither spouse is ineligible for the
exclusion by virtue of a sale or exchange of a principal residence within
the last two years. If you are married and your spouse dies, special
considerations may come into play if you and your spouse owned the house
jointly. You are entitled to the $500,000 exclusion if you sell your residence
in the year of the spouse's death. But if you wait until the following
year to sell, the $250,000 exclusion applies (assuming you haven't
remarried). Further, if you own a vacation home as well as a principal
residence, with careful planning, you will be able to have the exclusion
apply to both homes. In order to achieve this significant tax benefit,
after you sell your principal residence and claim the allowable
exclusion, you must take the necessary steps to establish your former
vacation home as your new principal residence. An understanding of the
tax rules associated with the sale of your home is critical in order to
take advantage of significant tax savings.
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· Paying the
IRS-Offers in Compromise
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As a result of recent negative publicity associated with IRS
tax collection tactics (and a change in the tax laws), the IRS has never
been more willing to "compromise" one's overdue tax liability.
Often, the compromise that the IRS is willing to make takes the form of
installment payments to pay off the tax liaiblity over time. This is
particularly useful because it prevents the IRS from liquidating major
assets. But if a taxpayer cannot swing an installment deal with the IRS,
an "offer in compromise" may be apporpriate.
An offer
in compromise actually reduces the total tax liability outstanding,
usually in return for a committment to pay this reduced amount over a
period of years. If you decide to make an offer through the IRS's Offers
in Compromise program and the IRS accepts, they cannot collect any
additional tax from you. The IRS can accept an offer only if there is
doubt whether the liability exists or doubt as to whether the tax can be
collected. The latter instance must be supported by the submission of a
Collection Information Statement which requires disclosure of one's
assets, liabilities, income and expenses to substantiate one's inability
to pay the full amount of the tax liability. The Offer in Compromise is
submitted with a nonrefundable $150 fee, designed primarily to discourage
frivolous claims. In a proper case, one should consider this as an
ooportunity to resolve outstanding tax liabilities and avoid tax
collection tactics.
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· Don't Say I
Didn't Warn You!
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In an earlier tax newsletter, I noted that the IRS has been
attacking S corporation owners who attempt to avoid employment taxes by
treating payments as distributions paid from earnings and not as wages.
Just in
the last month, several new court cases have upheld the IRS' position on
this matter. (Of course, this doesn't include all of the IRS examinations
on this issue that never go to court!) The taxpayers were not only
assessed additional taxes and interest, but were assessed a myriad of tax
penalties. If you are an S corporation shareholder, please review this
compensation issue carefully and avoid the hassles associated with
"getting caught".
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