Discussion:Professional services corporation
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> Professional services corporation
Discussion Forum Index --> Tax Questions --> Professional services corporation
Monroe2008 (talk|edits) said: | 12 December 2007 |
| My business is presently structure as sole proprietorship.
In the past I considered changing the entity type to an S corporation to potentially save taxes. However, it was my understanding that businesses organized as a corporation providing professional services such as accounting, legal, architectural etc.. were classified as personal service corporations. Personal service corporations are subject to a 35% flat rate. Does this only apply to C corporations and not S corporations??? Therefore, could I change my entity to an S corp and not be subject to the 35% flat rate for personal service corporations?? Based on our research and correspondence with the IRS it appears that the personal service corporation classification only applies to C corporations and NOT S corporations. We would change to an LLC and file form 2553 to elect to be taxed as an S corp. Any ideas would be appreciated. Thank you. | |
Death&Taxes (talk|edits) said: | 12 December 2007 |
| the 35% rate only applies to C Corps.
There is much discussion on this board about forming LLCs then electing S, as opposed to incorporating and electing S. Seems to me it could depend on your state of operation. Try our search block to the left: try "LLC electing S Corp" or here is one...read Mr. Dugan's commentaries Discussion: S Corp vs LLC. | |
| 12 December 2007 | |
| You also need to understand that the 35% rate only applies to the retained earnings or profits of the C Corp. and any salary you take will be taxed at your marginal rate. So if your salary eats up all the profits of the C Corp., then no tax at the corporate level. | |
| 12 December 2007 | |
| Comment moved from other thread:
You are correct that the flat rate applicable to personal service corps will not apply to an S corp, only a C corp. However, the "chatter" here and in all of the tax classes these days is that the IRS will soon be gunning for S corps paying less than reasonable salaries to their owners, thus you should meet with a tax professional to determine whether the tax savings are there. For a professional (e.g., atty, accountant, doctor) one could make the case that reasonable compensation for a highly profitable entity will be at least equal to the SS limit ($97,000 for 2007), therefore the only savings will be medicare on the S distributions. And the FICA saved by taking a reduced wage will be offset by lower allowable contributions to a retirement plan you may want to set up. So you may want to remain a SMLLC rather than an S corp. But, don't take my word for it, meet with a tax person to more fully discuss the issues. | |
