Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for March 16th, 2009

Setting up a corp…

Posted by taxguru on March 16, 2009

Q-1:

Subject:  S-Corp vs. C-Corp

Kerry,

I read your article on S-corporations vs. C-corporations.  Thank you.  The article was very informative.

I suppose one benefit of S-Corp status would be in a situation where the entity generates significant losses early in the life of the company and the individual has other taxable ordinary income from which these losses can be deducted.  The present value of deducting those losses would likely be beneficial versus being trapped as NOL’s in a C-Corp. 

Am I thinking about this correctly?


A-1:

That is one way to look at this. However, you have fallen into the trap of believing that a business only needs one entity for its entire existence.

A more useful approach would be to use an S corp during the loss years if they will be helpful on the 1040s of the owners and then, when it becomes profitable, set up a new C corp to use to accomplish such things as smoothing out the income, doubling the potential Section 179 deduction, and shifting income between fiscal years.

Any creative tax pro should be able to know how to use multiple entities for maximum tax savings.  Anyone who claims that you have to select one single entity at the beginning and use it exclusively for the lifetime of the business should be avoided.

Thanks for writing.

Kerry Kerstetter

 

Q-2:

Thank you.

If you expect losses in excess of your basis due to the use of debt to finance an acquisition, is there a structure that makes the most sense
to deduct those losses against other income?

Thanks again.

 

A-2:

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 be more 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.  

You should note that geographic location should not be the main criterion for selecting a tax pro.

I wish I could be of more assistance; and I wish you the best of luck.

Kerry Kerstetter

Follow-Up:

Thank you

 

 

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