Q:

Subject: S-corp

 

Mr. Kerstetter,

 

I just read your article on S-corps on the internet, and now I am more confused than ever.  I am an insurance agent and my wife is a teacher.  In

2004, we had a net income of $112,000.00 and we paid $27,000.00 in state and federal taxes.  A friend of mine who is also an agent say’s that he will only pay around $13,000.00 on the same income.  Can you give me an idea of where I can find out what is best for me?  I really do not want to pay $30,000.00 in taxes if I can legally pay less.  I appreciate your article and any help you can give me.

 

thanks,

A:

It is really not possible to do a direct comparison of two tax returns with the same amount of income because of all of the variables that come into play to affect the bottom line.

However, if you are reporting all of your income on Schedule C, odds are that you are paying in several thousands of dollars each year just in self employment tax that could easily be reduced or eliminated by using a C corp.  A C corp also allows you to keep your maximum Federal income tax rate at 15% if you use the income shifting techniques properly. 

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.

Good luck.

Kerry Kerstetter

Q:

If the next Congress does away with the inheritance tax exclusions, if someone has already given away

part of his estate (against the now legitimate exclusion), I assume that will not be taxed retroactively.

What do you think?

And do you think the Democrats will work to repeal all the exclusions?

Thanks.

A:

I wouldn’t be so sure of that.  There used to be a time when laws weren’t changed retroactively.  That sense of fairness is no longer the case, especially for the Dems. 

One of the first things the Clinton-Gore team did when they assumed power in 1993 was to ram through a huge tax increase that they made effective retroactively to before they were even in office.  This included sticking it to Senior Citizens by raising the taxable portion of their Social Security benefits from 50% to 85%.  They are still very proud of this achievement.

When Hillary is coronated for her third term as co-president in 2009, we can expect the same kind of thing.  Repealing all of the Bush tax cuts has been a very explicit goal of the Dems, so we can pretty well kiss them goodbye when the Clintons move back into the White House.

Kerry Kerstetter

Follow-Up:

Thanks for your cheery reply.

Real-Estate Professionals Say IRS Snares Them by Mistake – IRS auditors are very selective in how they define real estate pros for the much more lucrative rental loss deductions.

Private tax both wrong and sneaky – This is basically like a homeowners association fee; but they call it a tax.

Q:

Subject: S-Corp Timeshare purchase

 

I have a client who’s S-corp (family owned) purchased a timeshare for use as the location for the Corporate Annual meeting.  Would the S-corp be able to depreciate this assets…if so what type of Asset would this property be termed as?

A:

 I have seen a lot of small corps buy timeshares for purposes of their annual meetings. 

I have depreciated them over the standard 39 years for commercial real estate and expensed the annual maintenance fees.

Kerry Kerstetter

Q:

Subject: C corporation question

Hi, I’m enjoying your blog.  I have a question I’m having difficulty getting the answer to.  If a C corporation is doing something illegal, it can expose officers to personal liability, but does the corporation have an obligation to inform shareholders of the illegal activity?  I don’t know whether you might be familiar with this issue.  I’m guessing it might be covered by SEC rules?

Thanks for any info.

A:

Any time there is a financial element involved, there is a fiduciary responsibility to not harm or do things that would jeopardize the value of the assets entrusted by others. 

In a case such as you describe, officers of a corp have a definite legal responsibility to do everything possible to safeguard and protect the value of the shareholders’ equity in the company.  Any officer who uses corp assets and resources to conduct an illegal activity, which would obviously harm the value of the shareholders’ investment, would be civilly liable to those shareholders, in addition to any criminal prosecution for their acts.

Part of the fiduciary responsibility includes full disclosure of anything possibly relevant to the value of a shareholder’s investment in a corp.  If pertinent information were withheld from the shareholders that would have an effect on their decision to hold or sell their investment, that would also be actionable.

The laws for specific remedies available to shareholders vary by state; so an attorney in the applicable state should be consulted as to how to proceed to recover compensatory damages.

I hope this helps.  Good luck.

Kerry Kerstetter