Q:

Subject: Benetrends

Hello Kerry,

I saw your article on Benetrends website regarding their Rainmaker plan. It looks great and I’m looking to do this. However, I’m a little concerned with how I could get usage of the money. I currently already run a franchise under a LLC and also work another job in the computer field. What I want to do is quit my job and focus full-time on my franchise. What I need the money in my 401K for is to survive on (working capital) during the first year of business. I’ve really already taken care of all the start up costs so I won’t need too much investment there. I was wondering what the tax implications are with:

Investing the funds from the Rainmaker plan in to my LLC. Am I able to write a check to my LLC from my new C-Corp as an investment? Then the LLC can do what it wants with the money? Would the LLC have to pay taxes on this money?

Thank you if you are able to answer.

A:

While you really need to pursue this in more detail with the people at BeneTrends and your personal tax advisor, you need to be very clear on exactly what the Rainmaker, or similar, plan entails.

As you hopefully know, taking money out of your retirement account for personal use is subject to ordinary income taxes, plus early withdrawal penalties if you are under 59.5 years old.

Basically, the BeneTrends program allows your retirement account to invest some or all of its cash into capital stock in a corporation that you will operate. The money will be posted on the corp books as capital stock in the equity section of the corp balance sheet. This is not income to the corp.

As manager of the corp, you have a very strict fiduciary responsibility to protect and maximize the value of the investors’ equity and must refrain from personal enrichment at the investor’s detriment. In this case, your investor is your retirement account. This means that the money that is invested into your corp must only be used for prudent and reasonable business purposes. This can often include a reasonable amount of compensation for corp management.

You can check with the folks at BeneTrends to see if their governing documents include any restrictions or limits on how much compensation you are allowed to take for yourself. Likewise, there may be restrictions on the use of too much of the capital investment in corp investments, such as the LLC you mentioned.

If the LLC investment is allowed under the governing documents, it will not be income to the LLC. It will be posted to the member equity account for your corp on the LLC’s books.

As with all tax matters, the burden of proving that you are doing everything properly lies with you. This means that you need to be extra prepared to defend any decisions you make as manger of the corp regarding the use of the funds against any possible IRS accusation of self-dealing or personal enrichment.

Good luck. I hope this helps give you some issues to discuss with your personal professional tax advisor and the BeneTrends people.

Kerry Kerstetter

Follow-Up:

Thank you Kerry. I am just trying to see if this is a feasible plan so I can spend 100% of my time building my new business.

Update:

I recently learned of another company providing a similar service in setting up, SDCooper Company in Huntington Beach, CA.

Contest Winner Declines ‘Free’ Airline Tickets – He doesn’t want to pay the taxes.  It would obviously be a different story if IRS and the State of New York were willing to accept some of his tickets as payment of the taxes; but it doesn’t work that way.

Q:

Dear Mr Kerstetter,

                  if I change from an S corp to a C corp and also change from fiscal to calendar tax returns, is there a time period that I have to wait till I can  exercise all the benifets of a C corp,

                  sincerely, and thanks,

A:

There are far too many variables involved with a conversion from an S to C corp for me to be able to give any advice.  You need to work with a professional tax advisor who can help you accommodate your special circumstances.

For clarification, S corps are only allowed to use calendar tax years, ending December 31; while C corps can end their years at the end of any month.  As I have mentioned on my website, after converting from an S to a C, IRS will not allow you to change the tax year because they know how easy it is to reduce taxes with a non-December fiscal year.

What I have found on several occasions working with clients who had first considered converting from S to C, was that it turned out to be a whole lot easier to just set up a brand new C corp, where we didn’t have any of the restrictions that a conversion requires.  That could very well be what your personal tax advisor will recommend for your satiation.

I hope this helps.  Good luck.

Kerry Kerstetter

 

Q:

Subject: Laws

Can I hide child support through a corporation regardless of  a S or C. Can the state of PA look at my records for child support? How about if I have someone else as my Director? Can they track this? Thank you K

A:

I’m assuming that you are referring to hiding your income from child support requirements.  Those laws are state specific; so you will need to consult with a PA attorney who is familiar with your state’s requirements for disclosure of income related to child support.

I do know that it is a common technique to use corporations to hide income and appear more impoverished.  Back in California, one of the CPAs who I used for tax prep assistance during tax seasons had me pay his corporation for that very reason.

If the court only requires you to present a copy of your 1040 each year for the determination of the child support amount, it does make a big difference whether you have an S or C corp.  As with the real life case from here in Arkansas that I described on my website, a profitable S corp’s earnings will show up on your 1040, inflating the gross income, even when the actual cash you may have received was much less, or even nothing.

As I always warn everyone, the establishment and use of a corporation of any kind is not the kind of thing you should be doing without the aid of a competent professional tax advisor.

Good luck.

Kerry Kerstetter