Discussion:CPA practice - legal entity choice ??
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Discussion Forum Index --> Tax Questions --> CPA practice - legal entity choice ??
| 7 September 2006 | |
| I would like to get a feeling for what other practitioners are doing out there as far as legal entity choice. What is the benefit in CA for practicing as an S Corp over SP? Obviously the S Corp does not bring liability protection to the CPA but are there other benefits? Any thoughts on this would be greatly appreciated. I am a SP for now but plan to hire people (1 -2) this spring. THANKS for any insight! | |
Death&Taxes (talk|edits) said: | 7 September 2006 |
| I would honestly look at being a C Corp; I have been one since 1990 when our S Corp found it could not deduct our health insurance when we began a group with our employee. That has changed, of course, but we also instituted a nominal Medical Reimbursement plan, an eye-care plan and a group-life-short-term disability plan. These benefits enabled us to give employees benefits without horrendous wage increases, though admittedly these people were support personnel. Btw, the medical plan reached $2,000 per year and for years we carried 'fee for service' health insurance. With one 'partner' this meant that 2/3rds of the benefits went to shareholder/employees as we had only one other full time person. Now I am the sole shareholder and have no full-time employees, but see little reason to change. I would not recommend a C Corp to most clients since it requires hands on management, but as an accountant, you will know where you stand come December 15th, so that you should be able to avoid Personal Service Company taxes on any profits. | |
| 7 September 2006 | |
| Yep, that will work. Setting up a self-insured medical reimbursement plan will be the primary driver for selecting C status. The downside is the 35% tax rate applicable to Qualified Personal Service Corps, which a CPA/Tax practice will be. This downside is manageable by paying out bonus at year end to bring taxable income to zero. Alternatively, the attraction to S status is the opportunity to reduce FICA taxes by paying a "reasonable salary" which to the owner and taking out amounts in excess of that as S distributions without FICA taxes. The downsides of this plan are: a)Some people in this forum will argue that the IRS is ready any day to bring the hammer down on all of those profligate accountants who are using this "loophole" to avoid paying FICA taxes and b)Contributions to retirement plans are dependent on wages paid, so reducing wages paid to owners in order to save FICA taxes in aforementioned "tax scheme" will at the same time reduce the amount allowed to be contributed into your retirement plan. Pick your poison. | |
Death&Taxes (talk|edits) said: | 7 September 2006 |
| Much of this discussion depends on the salary levels of those you are hiring: office help or future 'partners.' I would mention that a C Corp is also a wonderful stimulus to forming a pension plan. At the end of one year, there was $12,000 profit, but to bonus it out only meant lending it back to keep us afloat until tax season, so we did not bonus. Came the next July, after filing the 7004, we opened a SEP using our profit as our benchmark for contribution percentage. Paying potential taxes has a way of focusing the mind! And note that the SEP, along with the other benefits, saved us FICA taxes. | |
| 7 September 2006 | |
| I have S corps that have Medical Reimbursement plans; am I missing something? | |
| 7 September 2006 | |
| I plan to hire a support person who can assist me with my QB clients and then data entry work on the tax returns. So not high salary staff. I would put this person on a group medical plan as well as include them in some type of profit sharing type plan at year end. | |
John of PA (talk|edits) said: | 7 September 2006 |
| My understanding is someone who renders personal services cannot be a C Corp without running the risk of being lableled a personal service Corp and subject to the penalty of paying the maximum 35% tax on any taxable income. Also I understand that a CPA gets no legal protection by incorporating or forming an LLC. You are still personally liable for malpractice claims, and if someone trips and falls in your office. The only legal protection you would have is your trade payables in the event you went bankrupt. | |
| 7 September 2006 | |
| I was thinking I might be able to save on some taxes with the S Corp because the S Corp would at least get a deduction for the payroll taxes paid. But seems like the SE tax already takes that into account since SE is calculated on .9235 of the SE income. I was thinking of forming an Accountancy Corporation, choosing S status. Am I totally off base? | |
| 7 September 2006 | |
| LJACPA, sometimes we do things and can't remember the reason. My recollection is that medical reimbursement plans are one of those fringe benefits that are not allowed for self-employed individuals. S corporation shareholders owning over 2% of the stock in an S corp is considered the same as a partner and hence, is self-employed for the purpose of applying this rule. So the S corporation can set up the self-insured med reimb plan, but the stockholder (nor the stockholder's spouse, since he/she is an owner by attribution) cannot receive any of its benefits. But, oddly, the sole proprietor who employes his/her spouse for bona fide services performed can set up a med reimb plan to benefit the spouse who, by the way, has the sole proprietor/owner as the "medical dependent" of the spouse-employee.
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| 7 September 2006 | |
| Jdugancpa, I understood from your explanation that a sole sahreholder of a S corporaion, who pays himself a reasonable salary, can draw all the profit of the corparation without paying FICA. Is this correct? How about income tax? Would he not have to include that in his W-2? | |
| 7 September 2006 | |
| No, FICA would be due on the wages paid. What is left in the S corp in the form of profits not paid out in wages (i.e., taxable income) would flow from the S corp to the stockholders' 1040 (via Schedule K1). It will be taxed at the individual 1040 level whether or not it is paid out. But, once taxed, it will not be taxed a second time when it is paid out in the form of dividend. And, the portion of profits paid to the owner in the form of dividend is not subject to FICA or SE tax. | |
| September 7, 2006 | |
| LJA, sorry to wreck you day, but you can't do med. reimbursment plans in S's...been that way a loooong time now. Crud, huh?
I'm an S, don't tell me there's a better way. No way, no how, unless IRS can tell me for some reason that 100% of my profits s/b subject to SE.... | |
| 7 September 2006 | |
| JR1 - I trust you. Since I'm sitting on the fence, I'm going with the S too unless somebody tells me why I should not. Thanks for all of the input! | |
| 7 September 2006 | |
| Wasn't it Reagan that said, "Trust -- but verify!" Good words to live by! | |
| 7 September 2006 | |
| JR, just because you are a "Platinum Contributor" and I'm only a "Gold Contributor" doesn't give you the right to lord it over me. That really hurts my feelings. :) | |
| September 7, 2006 | |
| LOL! And every time you make me respond like this, my star rises just a bit higher....I'm just glad they've not removed all the incorrect posts...! | |
| 7 September 2006 | |
| 10% reduction in edit count for anyone who "lords it over" anyone else. ;-) | |
| 8 September 2006 | |
| Back on topic, if you don't mind. I'm really lost now. Has anyone ever heard of BASE? I have several clients, sole proprietor's with spouses as 'bonafide' employee and S corps with shareholder as employee under a Section 105, HRA plan. I have a document from BASE explaining how all of this works through an S corp. Am I completely dumb, but isn't an HRA a medical reimbursement plan as discussed here? I can't attach that PDF here, but if anyone would like to read it, I'd love you to as it would help me, I'll email it. | |
Death&Taxes (talk|edits) said: | 8 September 2006 |
| Rev. Ruling 91-26 for fringe benefits paid on behalf of 2% or greater shareholders | |
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