Tax Guru – Ker$tetter Letter

Q:

Subject: S Corp. question

Hello:

I know you are not in California.  However, I was wondering if you could shed some light on a question.

I am an independent contractor (personal trainer), I have been filing a schedule C and paying city tax as well for the last 8 years.  I have grown my clientel where I personally earn +$150,000.  I think if I form an S Corp. I may be able to limit some of my tax liability.  For example, if I draw a $60,000 income, I can same on SS Tax, be only taxed (income wise) on the $60,000 and only pay a corporate profit tax on the remaining $90,000.

 

Does that seem correct to you?

 

I am just worried that the IRS will come back and say, “Hey, last year you made +$150,000 and now you’re claiming $60,000.  Where’s the rest?”  And I am afraid they won’t see the extra $90,000 as profit.

 

Any thoughts would be greatly appreciated.

 

Thanks,

A:

As long as you handle and report the corp and personal income and expenses properly, IRS shouldn’t have any problem with the fact that your business has gone through the normal transition from a Schedule C sole proprietorship to a corp.  I have worked with thousands of such businesses and I can’t recall one incident where IRS audited a tax return just because the taxpayer moved his/her business to a corp entity.  While there are obviously huge tax savings opportunities by using a corp, there are also other important reasons to do so, so IRS doesn’t automatically suspect a business owner of anything wrong just because s/he chooses to make that change.

Generally, in the first year or two, there is some overlap with ID numbers used on 1099s and other documents that could cause an IRS matching problem.  An experienced tax professional will know how to report these items in such a way as to avoid any actual problem with IRS and/or the State tax agency.

In regard to what particular steps you should be taking, there are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country. 

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you. 

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter