Significant tax savings might be available for small companies where the owner also provides labor. Should I operate my business as an S-Corporation? We will discuss the potential tax benefits, which types of companies might want to make the change and how a San Diego CPA can help you save money.
What is an S-Corporation?
Business owners might choose to organize as a partnership, Limited Liability Company (LLC), C-Corporation or S-Corporation. Technically, the S-Corporation is a hybrid using the C-Corporation legal status and the tax status of partnerships. It is governed by Sub-Chapter S of Chapter 1 (sections 1361 through 1379) of the Internal Revenue Service (IRS) Code.
The S-Corporation status was established in 1958, so it’s been around for decades. Hence, some business owners might wonder why present circumstances might make it profitable to change today. The answer is that you might be able to reduce your tax liability, which might have increased recently.
Which Businesses Are Eligible?
Entrepreneurs with startups or existing business owners might prefer to operate under the S-Corporation. Startups need to conserve cash and reducing their tax liability could make their operations more efficient. Existing businesses can use the saved capital and re-invest in their growth.
The S-Corporation structure provides businesses of all maturity levels with flexibility. In order to be eligible for the S-Corporation status, the organization must satisfy the following requirements:
- Fewer than 100 shareholders
- Shareholders are individuals, estates or trusts
- No nonresident alien shareholders
- Identical distribution & liquidation stock rights
All shareholders must be United States citizens or residents. Non-profit, tax-exempt 501(c)3 corporations can be S-Corporation shareholders; even S-Corporations can be shareholders of other S-Corporations.
Outstanding shares of stock must grant similar distribution and liquidation rights to all shareholders. Any profits or losses must be distributed by proportion of share ownership. Organizations can have shares with voting or non-voting rights.
Partnership Features
Just like with partnerships, the S-Corporation shareholder pays income taxes. Payments are distributed tax-free. It does not matter whether distributions are made.
C-Corporation Features
Wherever the business entity is organized, that state’s law will govern. Just like a C-Corporation, the S-Corporation is not eligible for a dividends deduction and not subject to a 10% taxable income charitable deduction limitation. Instead, the S-Corporation owners are taxed.
Specific S-Corporation Tax Benefits
Our San Diego CPA can review your financial statements to determine if your ownership structure, income and tax liability make you a good candidate for the S-Corporation. Many small businesses have a great deal of flexibility with respect to certain employee benefits. You might be able to adjust compensation to save money.
An Abbo Tax accountant can advise you as to the best course of actions. Under this structure, income or losses are divided amongst the shareholders, who must determine their liability on their individual income tax returns. Our CPA can help you take full advantage of this tax burden transfer.
We can estimate potential tax savings if you became an S-Corporation. Taxes can be a monkey on your back. The S-Corporation allows you to gain more control over your tax liabilities. These are just a few of the specific S-Corporation tax benefits:
- Payroll Tax
- ObamaCare Tax
- Health Benefits Double Deduction
- Sec. 199 Domestic Production Activities Deduction
The 15.3% self-employment tax (equal to Social Security and Medicare tax) might be particularly onerous. By changing to an S-Corporation, you can divide income into two categories: 1. Wages and 2. Distributive Shares. Neither the business nor owner must pay self-employment taxes or payroll taxes.
You might also be able to enjoy double deduction of S-Corporation fringe benefits (i.e. healthcare accounts) – once for income taxes and once for payroll taxes. And, since the Affordable Care Act (ObamaCare) tax appertains to high-income wages, a business owner can pay himself a wage that is lower than the designated tax threshold cut-off point and avoid the 3.8% ObamaCare surtax (net investment income tax).
Which Businesses Are Candidates for S-Corporation Status?
The S-Corporation status is ideal for small businesses, which want to minimize self-employment, payroll or other types of taxes. This structure might be better for high-gross-revenue, low-profit-margin businesses. If you want to reduce your tax liability, then you might want to consider this business structure.
For example, small construction firms, service companies and manufacturers, where owners also provide labor, might benefit the most from this status. For instance, they might be eligible for the Sec. 199 Domestic Production Activities Deduction. These small firms might have few employees because they hire independent contractors or third-party vendors to perform various tasks.
How Does a Business Become an S-Corporation?
You must file the Internal Revenue Service Form 2253 to become an S-Corporation. The deadline is March 15th for this application. Our San Diego accountant can prepare your corporate documents, complete the form and send it to the relevant authorities.
S-Corporation Taxes & Compliance
We, at Abbo Tax CPA, know that there is a lot of information to digest. Filing all of the paperwork yourself can be very difficult because you don’t know what to look for. And, that is why our San Diego accountant can assist you every step of the way.
Our accountants have incorporated other businesses, so we can expedite the process. We are your full-service accountant firm – reviewing your financial statements, assembling them and seeing if we need to change your wage structure or shareholder classifications to qualify.
While other accounting firms might only help you balance your books, we can become your full-service partners from start to finish. Our accountant can file IRS Form 1120S, which reports your income, gains losses, deductions and so forth. Our S-Corporation tax services accountants stay on top of all state and federal tax laws, so you remain in compliance.
Our Abbo Tax CPA firm can help you establish a solid, long-term tax strategy. This will allow you to continue to take full advantage of S-Corporation tax benefits. The best San Diego CPA will also work to unlock other potential tax savings.
Tax-Friendly S-Corporation
Corporate structure can make all the difference between success and failure. With the S-Corporation, you can legally avoid certain onerous taxes and create a more efficient corporate structure. Significant tax savings can be used to grow your business.
If you need a San Diego accountant to help you become an S-Corporation, then contact us today. We, at Abbo Tax CPA, are tax preparation and accounting professionals offering the full range of accounting services to our valuable clients. Create the right foundation for your business and the sky is the limit.
