From a financial planner:

Subject: Gifts

Don’t mean to be pickey but gifts do reduce the taxble income as in gifts to charity.  Hope all is well.

My Reply:

I think there is some confusion over terminology.

While some lay-people may use the term “charitable gifts,” we tax pros don’t.  There are charitable “donations” and “contributions,” which do reduce taxable income via Schedule A for those people who itemize their deductions.

There are also charitable “bequests” that reduce the taxable estate on Form 706.

However, we reserve the terms “gifts” and “gifting” to only designate transfers of assets between individuals.  These are part of the estate tax system and do not have any effect on the taxable income of the donor or recipient.  I have more info on this on my main website.

I hope this clears up your confusion here.

Thanks for writing.

Kerry Kerstetter

Q:

Subject: Gift Tax Limit 2006

Kerry,

I need to show an IRS certified verification that the 2006 gift tax limit will be $12,000.  Is there an IRS resource that shows this information.  So far, I have been unable to locate this information over the web.

Thank you for your time!

A:

Historically, IRS is always at least a few months behind the academic community when it comes to releasing the inflation adjusted changes in tax related amounts.  This means it probably won’t be until near the end of the year until IRS officially confirms the calculations that CCH released last week.

While he doesn’t include gift taxes, Professor James Young shows the actual inflation factors used in these calculations.

That will have to do the job for you for now.  Anybody demanding official IRS confirmation of those calculations at this early date is being completely unrealistic. 

Kerry Kerstetter

 

Q:

Subject: C versus S Corp

What a great article.  I am in the decision making stages of determining which is better for the purchase of an existing business (car wash in FL).  The problem I am having is the attorney suggest S and the CPA is suggesting C.  I am stuck in the middle.  Any advise?

Second option??

Regards,

A:

I obviously don’t know anything about your personal situation and thus have no idea which entity is better for you.

Assuming both of these individuals are competent, it seems that you should heed the advice of the one who most thoroughly understands your current and future tax and financial situation, which in most cases would be the CPA; but you may have different working relationships with your CPA and attorney.  

Choosing between a C or S corp really is only a taxation matter.  Legal liability issues, another very big reason to use a corporate structure, and what most non-tax attorneys are mainly concerned with, are identical for both types of corp.

Good luck.

Kerry Kerstetter

 

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Q:

Subject: looking for more tax free employee benefits

My husband has a small business formed as an S corp. He is 100% shareholder. There are two employees, himself and myself. There is a retirement plan and health insurance plan. On my husband’s W2 we must report as taxable income the health insurance premiums. Then we take a deduction on the 1040 for self-employed health insurance premiums.

We’d like to have more employee benefits, i.e.; a cafeteria plan to handle out of pocket medical and child care expenses.

A local CPA recommended that we do the following:

Keep the S corporation and set up another corporation as a C. The C would manage payroll, payroll taxes, employee benefits (cafeteria plan) retirement and health insurance plans. The S would pay a “Management Fee” to the C. Management Revenue in the C would fund payroll, taxes, benefits, retirement and health insurance. C corporation net income would as close to $0.00 as possible each tax year.

How does this sound to you? Is this a strategy that the IRS will approve of?

Please explain what expenses a C corporation can deduct that an S cannot?

Sincerely,

A:

It sounds as if you have a good creative thinking tax advisor there.  That is a strategy I have set up countless times over the years.

As I described in my article comparing S and C corps, there are much more generous tax free benefits available to shareholders in C corps than with S.

Rather than list out every type of fringe benefit, I’ve attached a copy of the table comparing the treatment of fringe benefits in different entities from the Small Business QuickFinder.

I hope this helps you understand the differences.  

Kerry Kerstetter

Update: 

The following article covering this same issue was included as part of the most recent Intuit newsletter for accounting pros:
Taking Cash Out: More Tax-Favored Fringe Benefits

 

 

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