Q:

Subject: S VS C

 

Hello Mr. Kerstetter,

 

…I am an Optometrist in Miami slightly confused on which Corp is better.  I am not sure if you answer personal questions but thought I would try.

 

By your comments it seems that a C is better but most Optometrist have a S.  I put my yearly income on about 130-150K and want to make sure I’m not paying the government more than I should. 

 

You mention that a C has a 15% tax bracket for 50K vs being taxed on the S corp total earning as sole owner .  My only concern is that a C corp is taxed twice and don’t know which one would be better.  What are considered royalty payments that are not taxed twice?  Also, I would be setting up a 401K but I’m limited to how much I can put in.  Would I be able to put my wife as an employee even though she is not doing anything for the corp and start her on a 401K? Can I put money away in a term life insurance to prevent double tax or any tax?

 

I hope that you may have some simple solutions for me.

  

Thank You

A:

There are far too many variables involved for me to be able to advise the best entity and jurisdiction to use for your particular situation via this medium.

To work out the best solution for your particular circumstances, you really need to work with a tax pro who can help you set up a strategy that will work for you.

I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

Unfortunately, we don’t have anyone else to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

It does look as if you are confused over the issue of double taxation.  This only happens when income that has been taxed at the C corp level is taken out by the shareholders as dividends.  Since dividends are not tax deductible by the corp, and are taxable on the shareholder’s 1040, it is being taxed twice.  The solution to this is to only take money out in ways that are deductible by the corp.  In fact, I advise my clients to banish the word dividends from their vocabulary.  A good tax advisor should have no problem helping you use a C corp in the best manner to avoid any double taxation.  It is not difficult at all.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Corp Tax Question

Can / Are principle payments made to shareholders who have loaned money to an S Corp considered / accepted by the IRS as a “cost of doing business” and therefore included along with other cost (material, wages etc.)?

Thanks for your insight

A:

The fact that you would ask a stranger such a question is a perfect illustration of how dangerous it is for anyone to try to run a corporation without competent accounting assistance. 

This is basic accounting and nothing tricky.  Principal payments on loans are balance sheet entries, which do not affect the profit and loss.  Interest payments are deductible as an expense.

Another issue that you need to consider is that all payments being expensed on the corporate books will need to be reported as income by the recipients. 

Get with an accountant ASAP before you go any further down the wrong road with your corporation.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Sale of residence

 

I appreciate the information found on your website, and would like your advice on the facts and circumstances surrounding a sale of residence.

A client of mine had leased a home between 2001 and 2004, then purchased the home in 2004 because of its private wooded surroundings and park-like back yard.  In mid 2005, a neighbor of there’s offered to purchase every home on the street.  His intent was to subdivide the land and fit new homes on the existing parcels…

My client turned the first offer down, but when approached a second time, the investor stated that the rest of the neighbors had already agreed to sell, and if they did not sell to him, they would end up with new construction surrounding there property that would diminish the quality of the surroundings.  My client eventually sold, and purchased a similar property elsewhere.

I would greatly appreciate your advice on qualifying this as an unforeseen circumstance.

Thank you,

A:

The key requirement for using the pro-rated exclusion is that something unanticipated happened after the home was purchased that materially changed the living conditions in the house for its owner and other occupants.  If IRS were to question the application of the exclusion, the homeowner would have to be able to convince them that, if he had known ahead of time what the change would be, he wouldn’t have bought the place.

In your client’s case, the change from a home with no big construction projects around it to one that is surrounded by construction is a material enough change to alter the living conditions enough to warrant a move.  Construction sites are noisy (making sleep difficult) and dangerous, especially if your client has young children. 

It seems that the only real burden your client would have is being able to convince IRS (in the unlikely event of a challenge) that he had no advance knowledge of the developer’s plans for his neighborhood and it only came to light after he had taken ownership of the home.  If that’s the case, he should have no problem qualifying for the pro-rated tax free exclusion.

Good luck.  I hope this helps.

Kerry Kerstetter

 

Q:

Subject:  Class Action Settlement – IRA qualified?

 

Kerry –

 

I recently received a payment from a prior employer as a consequence of a class action discrimination suit. The payment had deductions made for Social Security, Medicare, Federal and State income taxes. This strongly suggest to me that the payment is being treated as “back wages.”

 

My question is this. Can I make an IRA contribution based upon the monies received in this settlement? I am presently retired and do not have earned income with which I might otherwise qualify for an IRA contribution.

A:

It certainly sounds as if they will be reporting the income on a W-2, which will make it eligible to be treated as earned income for IRA purposes.

You didn’t specify your age.  If you are or will be over 70.5 during this year, you will not be allowed to contribute a traditional deductible IRA; but a Roth IRA is still possible.

Your personal professional tax advisor will be able to provide you with more specifics for your particular situation.

Good luck.
 
Kerry Kerstetter

 

Q:

Subject: Tax Question RE: liquidation of LLC to c-corp

 

Hello Mr. Kerstetter, we have researched the web and the print world and found your most helpful and valuable information. Thank you for your contributions to the web. We have a few questions that we are having a difficult time finding answers to, and would like to ask you if you’ll allow us. In our work, we’ve found we get what you pay for, so we are willing to pay for your advice. Let us know what arrangements need to be made for payment.

 

A multi-member LLC has liquidated it’s assets and each member is to receive distribution of the proceeds. If the member has not yet taken possession of the proceeds, how can the member direct the proceeds to invest in a c-corporation without receiving the proceeds directly?

 

Thank you for your time.

A:

You definitely need to be working with a tax pro on matters such as this.  In fact, you should have been working with one from before you even set up your LLC.

As you describe the situation, it might be too late to do anything to reduce your taxes, depending on how you had elected to report the LLC income. 

If it has been taxed as a partnership or S corp, the gains from liquidating the assets are a done deal and are to be passed on to the members via their K-1s, whether they take any cash out or not.  That is the main principle of pass-through entities.

If your LLC has been taxed as a C corp, there may possibly be ways to transfer the assets to a new C corp tax free.  It could be relatively complicated.

It would have been a much better idea to work with a tax pro before liquidating the LLC’s assets because there would have been more options available.  By waiting until now to consider the tax problems, it may be too late. 

If you have been operating your LLC for all of this time without the benefit of professional tax assistance, you have probably learned an expensive lesson. 

As it says below, we are too swamped with client work to be able to take on any new ones.

Good luck.

Kerry Kerstetter