Discussion:Thinking of changing from S to C corp
From TaxAlmanac
Discussion Forum Index --> Basic Tax Questions --> Thinking of changing from S to C corp
Discussion Forum Index --> Tax Questions --> Thinking of changing from S to C corp
| December 29, 2007 | |
| For those of you who operate as C corps, I was wondering how you do at managing the taxable income. My son needs braces and my other medical/dental out-of-pocket costs may be going up, so I was thinking of revoking the S election. | |
| 29 December 2007 | |
| Try to zero out profit before year end. If your create a loss, carryover to next year. | |
| December 29, 2007 | |
| That is the goal, but my concern is that just like the shoemaker whose children have no shoes, I will miss something and mess up. | |
| 29 December 2007 | |
| How much a percentage, if any, of your business comes from doing valuation work? | |
| 29 December 2007 | |
| I have clients meet with me in December with nearly completed books. Then we figure out how much owner payroll needs to happen on the last payroll of the year in order to zero out the profit. Remember that payroll is finalized January 31, so you have a month. Sometimes making the final payroll tax deposit timely is really the deadline, and that is often January 15 for a small company. | |
| 29 December 2007 | |
| It's aggressive, but you might be able to segregate out some activities that would not be subject to the PSC problem. There was a Private Letter Ruling that found valuation services not to be "consulting". I have not read it, PLR200606020. It's also my firm belief that bookkeeping services are not accounting services under the theory of used in Alron Engineering & Testing v. Comm., TC Memo 2000-335. I think that would be really aggressive though, especially if you are a CPA, but, if you have other investors in the bookkeeping business, and a separate marketing budget, perhaps. Then you could avoid PSC. That's all pie in the sky in all likelihood.
D&T operates this way, I believe, but I'm not sure. I don't think you can correct it all with a taxable bonus at the end of the year.... probably not that easy. | |
| 29 December 2007 | |
| But Greg, won't they re-characterize that as non-deductible dividend instead of compensation? Or they are not interested in us smallfry? lol | |
| December 29, 2007 | |
| Thanks Crow. I wouldn't even go there. I'm the only employee and a CPA. | |
PHIL MOODY (talk|edits) said: | 29 December 2007 |
| Bonus at end of year, and sometimes, the entire year's salary is paid in December.
With only one employee, in a C, you may form your own medical reimbursement plan. I guess that is where you are headed. Be extra careful that you absolutely, positively have no other (non family) employees. Watch out for those hidden "employees" such as independent contractors, that may actually be employees. A claim from an employee with triple bypass, or a kidney transplant could be quite costly. If you are concerned about the PSC, drop your DP department (and all your other equipment and furnishings) into the new C corp. Let your S pay the C for these services (fair market value). | |
| 29 December 2007 | |
| Hi Natalie,
With my C corps with only the owners as employees we maximise their pension contribution along with the year end salary to reduce corporate earnings. | |
| December 29, 2007 | |
| Thanks Anne. Setting up a pension would definitely leave a little room to play. | |
Death&Taxes (talk|edits) said: | 29 December 2007 |
| I have been using the C for years, even when I had a full time employee who participated in the medical plan. One piece of advice: when and if you have an employee, change the plan to only cover your expenses and boost your salary to cover the other items you might have to pay. My old corporation did not think of this and secretary had baby, meaning she was able to cover the child [she was not married].
If you, or I, can't make the C Corp work, who can? | |
| 29 December 2007 | |
| Natalie - I operate as a one person C corp as well, just for the reason you note - so that out of pocket medical costs can be paid.
Yes, any corporate taxes would be at the high PSC rates, so I've generated a small loss that I can carryforward as a cushion. Other cushions are Sec 179 deductions and accrual of a pension. If things really get messed up and a profit is inadvertently generated, later a loss available for carryback can be generated via increasing my salary. One downside would be at eventual sale of the business, but as others on this forum have helpfully pointed out, goodwill might be considered personal, as in the Martin Ice Cream case. Good luck! | |
| 29 December 2007 | |
| Natalie, I don't see any problem with paying a year end bonus. Half the firms I work for pay year-end bonuses. I would like to see an auditor argue that you're not entitled to wages for 100% of the profit, considering you do all the work! I'm not aware of any rule that says payroll must be even throughout the year, either. It most certainly can be adjusted up and down. It just needs to be "reasonable." Not too high, not too low. | |
| December 29, 2007 | |
| I guess, to me, the issue is whether you're willing to roll over and be dead on the social security issue. If a reasonable salary to replace you as the worker bee, not the owner, but the one who does the work, is 60k, and now you're eating the SS tax on the next 40k at 6k, how much are you figuring to save in medical costs? It just doesn't compute to me. Like I said, unless you're rolling over dead and taking SS on all the income anyway. When a gun is pointed to my head and someone like Congress tells me I have to do that, then the C corp makes sense. In the meantime, you save a lot on the differential between the salary and leftover profits, and free up the cash for your own retirement as well, which is further deducted. Tough to beat that with a couple thou of savings in a medical plan and having to live with a C corp to boot...yuck. | |
| 29 December 2007 | |
| Good point Greg, it's really not a return on investment (hence favoring dividend treatment), rather it's from the sweat of the professionals' brow. | |
| 29 December 2007 | |
| Sorry, JR1, I came in there at the same time, and your post was more relevant than mine. I agree that it's definitely something to take the pencil to before making the decision. | |
| December 29, 2007 | |
| Thank you all! Great points to consider. This certainly is a decision that requires some number crunching. Paul, I have health insurance through my corporation, so I am not eligible for an HSA. | |
