Q:

Subject: Tax Question, Of Course

Hi Kerry,

I read your blog and really enjoy your information. I am hoping you can lend a little guidance. While I know you probably need more information, I will provide as much as possible.

I am 35, single, no children. My business is organized as a C Corp in Washington State. The company’s income last year was $69, 000.I visited a “tax pro” today who advised that I file my corporation as an S corp. I have been reading many differnt tax authorities, such as yourself including Sandford Botkin and Diane Kennedy, so I disagree with his recommendation, but I could not effectively explain it to him. Interestingly, he was not familiar with Botkin or Kennedy.

When I explained to him that I wanted a C corp because of the deductions of healthcare, and income splitting, he indicated that the deductions I would get from healthcare would not outweigh the deductions I would get from an S corp and that the benefits of a tax year ending earlier than Dec would disappear after 2 years.

Last year was the first year of the business. I anticipate my income to at least double this year. Can you give me any guidance as to what your recommendation is??

A:

I’m not a fan of second-guessing the advice of other tax pros without knowing all of the same facts that they have at their disposal. However, if you are quoting your tax pro accurately, it sounds like he may not be right for you due to the all too common belief that S corps are a one size fits all solution for everyone.

Quick rebuttal of some of the points you mentioned. Generally, an S corp only makes sense tax wise if it will be generating losses for several years. A profitable business can save huge amounts as a C versus adding its income to everything else on your 1040. The income shifting opportunities with a different C corp fiscal year can actually go on indefinitely. To claim that everything balances out in two years is extremely short sighted.

Tax free fringe benefits are much more lucrative with a C corp than an S, including health care, childcare, and education assistance, things you may want to provide for your nephew, who you could set up as an employee if he helps you around the office. A good tax pro can assist you with these.

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

Follow-Up:

Dear Kerry,

I apologize that it has taken me so long to thank you for taking the time to make such a quick response to my question. I assume that you are very busy, and I appreciate you taking a moment out of your hectic schedule to share your opinion with me. Thank you for making this kind of education and advocacy readily available in a friendly and easily understood format.

I look forward to reading your blog and recieving the updates in my email.

IRS Puts a Stingy Spin on Pension Protection Act – From Gail Buckner

IRS to focus more on small businesses – Because of their bogus assumption that everyone is a tax cheater.  One more reason to use corporations, which have a much lower audit profile than do Schedule C sole proprietorships.

Some interesting items in the latest FTB newsletter:

20 Questions On the new Real Estate Withholding rules

Real estate withholding – compute estimated gain or loss online – Including new Form 593–E to calculate the actual profit on real estate sales rather than be forced to have the standard 3.33% of the gross sales price withheld..

Filing Deadline – FTB hasn’t wasted any time adopting the IRS’s recently announced extended filing date for 2006 income tax returns of Tuesday, April 17, 2007.  Other state tax agencies are not as quick to address this one day discrepancy. 

The big argument from the Left against tax cuts is the fact that most of the savings go to the richest people, and under their logic, it’s pure evil to ever allow any fat-cat to keep more of his own money.

Brian at Seadog Bytes has just posted this excellent analogy between tax cuts and refunding ticket money from a rained out baseball game.  I’m sure the irony of this example will go right over the heads of our tax loving rulers.