Tax Guru – Ker$tetter Letter

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Archive for November 3rd, 2008

S Corp taxes under 0Bambi?

Posted by taxguru on November 3, 2008

Q-1:

Subject: S Corporations

Tax Guru,

I am a Obama supporter but work at a S Corporation. Needless to say, I am getting hammered for my voting preferences.

Can you tell me if Obama will destroy S Corporations. I read he would increase from 35% to 39% on scorps but can not find any evidance that he will not due away with them.

Any help would be greatly appreciated.

Obama & Scorp supporter.

A-1:

S corps don’t pay taxes. Their income is reported and taxed on the 1040s of the shareholders.

Since Obama is promising to raise the tax rates for 1040s, the end result will be higher taxes for the shareholders on their S corp income.

I don’t see any push to eliminate S corps because they are often taxed at higher rates than C corps.

I hope this helps you understand.

Kerry Kerstetter

Q-2:

Thank you for your response.

I currently have around 40,000 in stock through our S-corp. However I have never seen my stock or dividends on my yearly income.

Our company is roughly 2400 people, employee owned, with 6 "owners", 5 real people and one account (representing the esop balance).

If I dont pay taxes on my dividends ($5.50 per share last year) until I retire then is S-corp advantagous to C-corp?

Thank you so much for your responses. I am trying to understand the situation but find it beyond my grasp at this time.

Please advise..


A-2:

It sounds like you have an interest in a tax deferred retirement account. You’re little vague on the dividends you received, but I’m assuming that those were deposited into your share of the retirement account and not actually paid out to you directly.

While the details of retirement plans can vary, the basic concept is that you pay no taxes on any income it earns while your money is inside the plan. When you start to draw it out, you will pay income taxes on your distributions at ordinary income tax rates for the years of the withdrawals. If you are under 59.5 years old when taking distributions, you may also be subject to the additional 10% Federal (+ your state’s) early withdrawal penalties if you don’t meet any of the exceptions for that.

I really don’t see how whether your employer is a C or S corp will make any difference to you in regard to your taxes on your share of this retirement account.

Your retirement account administrator and your personal professional tax advisor should be able to explain how this all works in much more specific detail for your unique situation than I possible could.

Good luck.

Kerry Kerstetter

Business Plan Pro

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