A GOP Tax Increase? Some Senators are eyeing rates on capital gains and dividends. – Another attack of the RINOs.

Q:

Subject: looking for more tax free employee benefits

My husband has a small business formed as an S corp. He is 100% shareholder. There are two employees, himself and myself. There is a retirement plan and health insurance plan. On my husband’s W2 we must report as taxable income the health insurance premiums. Then we take a deduction on the 1040 for self-employed health insurance premiums.

We’d like to have more employee benefits, i.e.; a cafeteria plan to handle out of pocket medical and child care expenses.

A local CPA recommended that we do the following:

Keep the S corporation and set up another corporation as a C. The C would manage payroll, payroll taxes, employee benefits (cafeteria plan) retirement and health insurance plans. The S would pay a “Management Fee” to the C. Management Revenue in the C would fund payroll, taxes, benefits, retirement and health insurance. C corporation net income would as close to $0.00 as possible each tax year.

How does this sound to you? Is this a strategy that the IRS will approve of?

Please explain what expenses a C corporation can deduct that an S cannot?

Sincerely,

A:

It sounds as if you have a good creative thinking tax advisor there.  That is a strategy I have set up countless times over the years.

As I described in my article comparing S and C corps, there are much more generous tax free benefits available to shareholders in C corps than with S.

Rather than list out every type of fringe benefit, I’ve attached a copy of the table comparing the treatment of fringe benefits in different entities from the Small Business QuickFinder.

I hope this helps you understand the differences.  

Kerry Kerstetter

Update: 

The following article covering this same issue was included as part of the most recent Intuit newsletter for accounting pros:
Taking Cash Out: More Tax-Favored Fringe Benefits

 

 

House, Senate Reach Agreement on Hurricane Tax Relief Package – Many of the provisions will be retroactive, making staying up to date on the appropriate rules even harder than normal this year.

Feds Bust Scamming Nevada Tax Preparer – It’s a bit difficult to generate any sympathy for the several hundred clients of this idiot who fell for his ridiculous argument that wages are not real income.

IRAs and 529 Funds Don’t ‘Compute’

Chaos, Contempt Mark Start Of Latest Schiff Trial – The Feds expect it to take six weeks to hold the latest trial of this moron. 

TaxProf blogger Paul Caron also has secret news sources inside the IRS.  He received this notice from an IRS employee that a courier transporting 30,000 payments for individual income tax estimates (1040–ES) across the San Mateo Bridge had an accident last Sunday that sent them into the San Francisco Bay. 

Since this happened on September 11, these were most likely for third quarter 2005 payments, which were due on 9/15.  Assuming there was no recovery effort, it will be impossible to know whose payments those were.  Anyone who did send a payment to the San Francisco IRS address should check their bank account closely to see if it clears in the next month or so.  If it hasn’t cleared by then, you should call the IRS (1–800–829–1040) to verify that the payment is not in process.  You should then send in a replacement check so that you are not underpaid when you file your 2005 1040.  Because this is the IRS’s fault, I would date the replacement check the same as the original check and use that date when entering info for Form 2210 (Underpayment of Estimated Tax) so that you don’t incur a penalty for this. 

I did several searches on Google News and several Bay Area newspaper sites to see if there was any mention of this accident. Nothing.

Bush Rules Out Tax Hike to Fund Recovery – Why assess new taxes, when it would make so much more sense to simply spend less on stupid pork barrel projects.  Of course, DC is well known as the land where common sense doesn’t exist.