Tax Guru – Ker$tetter Letter

Q:

Subject:  s versus c article

I read your article with some interest and have a question about your tax splitting.

Lets say the C-corp does a split and takes $50k in a 15% bracket. Now what? A C-corp doesn’t have to buy food or put a kid through college. Why is it helpful for the C-corp to have 50k in the bank, especially if you are an individual with small company and just want all your money in your pocket so you can buy cocaine?

A:

The effective use of C corps to shift and smooth out income is a multi-year process; so looking at one year’s end result isn’t the best way to evaluate it. Any experienced professional tax advisor should be able to assist you with implementing these tactics in the best way for your particular goals and situations.

So, in addition to your particular financial priorities, be sure to budget enough money to pay for the services of a good professional tax advisor.

Good luck.

Kerry Kerstetter

Q:

Subject:  C Corporations

How do I find an accountant in my area that is comfortable with C corporations. It seems like each one I talk to wants to continue to steer me away from them?

 
A:

That is frustrating; but look at the good side of that situation.  Any tax pro who doesn’t understand how to utilize C corps effectively is doing you a huge favor by admitting his/her shortcomings up front, saving you from wasting a lot of time.

As I have repeatedly said, C corps are not automatically a one size fits all solution for everyone any more than S corps are.  Any tax pro who can’t logically explain his/her rationale for recommending any particular strategy, including the fact that all of the pros and cons that I have spelled out have been evaluated, is to be avoided.  Anyone who automatically rules out C corps without asking you a ton of questions and tries to assume that an S corp is automatically the right approach is too lazy and/or ignorant to be trusted.

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  

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