Q:

Subject: C vs. S Corporation

 

Hi Kerry,

I’m a new (solo) owner of an internet software business (c-corporation in Delaware), and was wondering if you could tell me if it’s more advantageous to be a s-corporation? I’ve read your online article about c vs. s corps and decided to go with the c-corp, but recently a CPA/APC told me that i’d be better off as a s-corporation?

Thanks for your advice,

A:

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.

As I mentioned in my article on C vs S corps, too many advisors do rush into S corps without thinking things through as completely as they should.  If your CPA is this way, you should check with another one who can take more of a long range perspective.

Good luck.

Kerry Kerstetter

Q:

Your website is very helpful. Thank you!!

 

I am using quicken home and bu. 05.  Recently, our business (a small co. offering professional services) started taking credit cards.  The credit card company automatically credits our bank account with the amount of the credit card purchase less the charge for doing the transaction. 

 

Before we started taking credit cards, I just recorded the client income as deposits in the quicken checkbook.  Should I now just record the net amount as a deposit?  This would not give me a record of what the person actually paid.

 

Any help you can give me in this matter would be appreciated.

A:

It’s very easy.  You need to enter the deposits as split entries on more than one line for each.

You post the full amount to your income account and then on the next line have a negative entry that goes to the “Credit Card Charge” expense account.  

This is the exact same way paychecks are supposed to be entered; starting with the gross pay and showing each of the withholding amounts on a separate line, to arrive at the net amount deposited.

Good luck.  I hope this helps.  Your personal tax and accounting advisor can show you in more detail if you need more explanation.

Kerry Kerstetter

Thanks to Joe Kristan of Roth & Co for the heads-up on the AICPA’s new article about existing tax and accounting blogs, as well as some excellent tips for people who may want to start their own.  They have links to several new blogs that I wasn’t aware of.  It’s good to see that more accountants are jumping into the blogosphere and utilizing this very effective marketing and communication technology.  

Senators propose repeal of tax trap for middle class – Are we actually going to see the end of the insane AMT? I wouldn’t hold my breath; but it’s good that our rulers are at least discussing how unfair it has become. 

Q:

Kerry;

Wow, we never realized my daughter would inherit the cost basis of my dad on the stock. Since it started out at $200 and is now around $10,000 that makes a difference. Since we keep her income below the amount that she needs to file a return (I believe it  is $4,800?) would we have to file a return if she cashes in only amounts that keep her under that $4,800?  If we cashed out part now and then  part in January 2006 would that work?  She has currently earned $1,800 from working for our company and was going to have a job this summer. Perhaps her tax basis will be low enough that the amount she would be taxed would be minimal anyway.

We always enjoy reading your newsletter each morning and saw our question in there. Reading other peoples questions and your answers is always a great education tool for us.

Thank-you;

A:

That is the big difference between receiving appreciated assets via gift versus via inheritance.  With an inheritance, the heir’s cost basis is stepped up to the asset’s fair market value as of the date of death.  This effectively wipes out the decedent’s capital gain; although it could result in estate tax if there is a large enough taxable estate.

The standard deduction for 2005 is an even $5,000, so if she has less total gross income than that for this year, she won’t be required to file a 1040.  Filing a tax return is a bit of a hassle and expense; but it still may make sense if she needs to sell off more than $3,200 worth of the stock.  Odds are that her effective tax rate will be much lower than it is for your parents, such as 5% instead of the 15% they would probably owe for Federal income tax.

As you should have noticed in many of my other postings, I have always believed it to be a big mistake to hold onto stocks just based on the tax effects.  Hold or sell decisions should be purely based on whether that stock is a good investment.  If is looks like it has peaked and is about to dive, it would be nuts to hold onto it just to avoid going over the $5,000 income threshold.  The 5% taxes saved will be small compared to the actual dollar loss in the stocks.

As you noticed, I do use these emails as an educational tool for my readers.  One point that may not apply in your daughter’s case, but I have seen in others.  The $5,000 income level for a tax return filing requirement is based on the gross income, not the net profit.  This is a big mistake I have seen many people make.  They may sell stock for $50,000 that has a cost basis of $49,000, or more often, more than the $50,000.  Assuming that the tiny net gain or net loss isn’t enough to warrant filing a 1040, they don’t. 

What eventually happens is that IRS receives the 1099-B from the stockbroker showing $50,000 of stock sales.  When they don’t see a tax return reporting this, IRS computers spit out a letter claiming that there was unreported income, along with a bill for taxes, interest and penalties on $50,000 of ordinary income.  Unless a taxpayer tells them otherwise by filing a tax return with Schedule D, IRS literally assumes that the stock had a zero cost basis and that it was owned for less than 12 months, subjecting it to ordinary tax rates rather than the lower long term capital gain rates. As I constantly emphasize, filing tax returns, even when there may be no tax effect, is a self defense measure that can head off problems such as this.

I hope this helps your family work out the best game plan.  Let me know if you have any other questions.

Kerry

 

The Vulture Tax – Stephen Moore has another very appropriate name for the communistic estate tax.  If our rulers in DC can’t kill it now, with full GOP control, it may never go away.  The chances of ending this evil confiscation will drop to zero after 2008, when the Clintons are coronated for their third term in the White House.  Those two are the most avid supporters of Karl Marx’s principles as any president in our history.

Q:

Subject: Incorporation

 

Our PTA is being asked by the local BSA to charter them.  We are trying to get all information possible and someone suggested incorporation.

Our main concern is “willful acts”  and the liability taken on by the officers.  Would incorporation be possible?  How hard is it?  How would this protect us?

Who would this protect?  Would a local PTA be able to incorporate?

I hope you can help!
Thank you for your time!

A:

It sounds as if you need to be more concerned with the legal liability issues than any tax issues.  Thus, this is out of my area of expertise.

While Nolo Press has some excellent resources for working with nonprofit organizations, it would a prudent move to consult with an attorney who is familiar with the liability rules for nonprofits in your state.  They do vary in different jurisdictions.

Good luck.

Kerry Kerstetter