Discussion:Help - S or C for 1 man professional
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| Revision as of 15:31, 22 January 2008 Corptaxhelp (Talk | contribs) (No Money? No Corporation.) ← Previous diff |
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| Really, Kendrick, what is your gut telling you? Does this client really need a corporation?}} | Really, Kendrick, what is your gut telling you? Does this client really need a corporation?}} | ||
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| + | {{ForumReplyPost|UserID=RJM|Date=22 January 2008|Text=Corptaxhelp- I agree. Just run the numbers for a few years and you will see if the medical expenses are worth the hassle of being taxed as a C. If there is a time horizon less than 10 years or so, a dissolution should go into the projection as well, cuz this event has varying taxability depending upon entity, asset mix, etc. Just a simple income statement projection can be done in a few minutes on excel. And of course Kendrick should bill for the time! I have 2 clients in particular who are 1-man corps, who each go over $25,000 in medical expenses every year (both due mostly to out-of-pocket psychotherapy costs). For them it is a no-brainer to be taxed as a C. My wife and I have chronic conditions which also makes it a no-brainer for my business. Our out-of-pocket is always over $5,000 per year.}} | ||
Revision as of 17:54, 22 January 2008
Discussion Forum Index --> Basic Tax Questions --> Help - S or C for 1 man professional
Discussion Forum Index --> Tax Questions --> Help - S or C for 1 man professional
| 22 January 2008 | |
| Schedule C client, who employs only his wife, wants to incorporate.
This is how I see it. Am I right? If he chooses C Corp, he can create a medical reimbursement plan (or HRA), and can have the C Corp pay and deduct all medical insurance premiums and medical expenses for his family. Remember, he had no other employees other than his wife, and now himself, of course. Then the C Corp can get a defined benefit plan and pay and deduct the contributions. The only downside, the C Corp will be a PSC subject to 35% federal corporate tax rate (or whatever it is now) and could get nailed if bookeeping goes awry or he loses deductions in an audit. Ouch. Or he could be an S Corp, which would take care of the PSC worries, but the corporation would only be able to deduct the health insurance premiums (yeah yeah, put them on Box 1 of the W-2 BS) but would not be able to have the corporation pay and deduct a medical reimbursement plan. If so, the corporation would have to treat those payments as distributions. Of course there would be a defined benefit plan here, which would keep the FICA game out of the picture since he wants a max W-2. So C Corp, corp pays for and deducts medical health insurance premiums and expenses, but is subject to PSC rates. Or S Corp, corp pays for and deducts medical health insurance premiums BUT NOT medical expenses, but no PSC worries. Can it boil down to something this simple? Any input appreciated. Sorry for the ramble here, but I understand it better now just by writing it out. | |
| 22 January 2008 | |
| Yes, I agree with your conclusion. Where medical costs are significant, C is normally better. In my state we can form an LLC for free (nearly) on the state's website, and then elect to be taxed as a corp, so we don't need to pay an attorney to start up (although it's probably a good idea anyway). Also, the state fees for corporations here are fairly low.
If there is a significant retirement plan expense, it can be used to gobble up any income at year-end that sneaks through. You can fund the retirement account by the due date of the corporate return. Any others chime in? | |
| January 22, 2008 | |
| We can save time and pick S, or we can spend an hour to get there. You pick. There are more troubles with a C than PSC. | |
Bottom Line (talk|edits) said: | 22 January 2008 |
| What's the state tax effect? | |
Death&Taxes (talk|edits) said: | 22 January 2008 |
| If medical is the driving force, do consider the C Corp, but also remember that with PSC rules, it means they will have to depend on you to make sure there is no profit left over at the end of the year [translate that to higher accounting fees], and also if they are going to use a Defined Benefit plan, they are going to have to wait for the actuary to do computations.
Since he can have a 105 now, and a defined benefit plan now, he must have powerful liability reasons for incorporating, but in a personal services corporation (S or C), the corporation will not save him from his own misdeeds. | |
| January 22, 2008 | |
| Difficulty of shareholder loans requiring *gasp* real cash to repay. The problem of liquidation where any built in gains are taxed double. Same problem of built in gains when you do see the light and want to elect S. State taxes do matter. In IL, S taxes are 1/4 of the C. The opposite problem of reasonable comp if you're successful...trying to justify huge salaries and the risk of having them redone by the service to capture the double tax. Just warming up, only 1/4 cup of coffee down so far. | |
| January 22, 2008 | |
| Let's back up a little bit. Why does he want to incorporate? I aint a lawyer, but he will only get phantom liability protection.
If he is deadset on feeling good about liability, then he can get the same bogus protection with a SMLLC. And if his wife is a real employee, then he can still do a Sec 105 plan for her. What you lose is the FICA tax on the defined benefit plan. But if he's gonna be above the SS base anyway then that is only 3%. | |
Corptaxhelp (talk|edits) said: | January 22, 2008 |
| Kendrick, you're paid by the hour, right? Instead of waxing philosophical, why not do pro forma returns for 2008 and 2009 as both a C and an S corporation. Yes, that will require time, effort and a crystal ball but it is also the best way to model the results and present them to the client.
And what if the client isn't willing to spend the money to make the models? Then you have your answer: Neither C nor S. Schedule C or, maybe, LLC. Really, Kendrick, what is your gut telling you? Does this client really need a corporation? | |
| 22 January 2008 | |
| Corptaxhelp- I agree. Just run the numbers for a few years and you will see if the medical expenses are worth the hassle of being taxed as a C. If there is a time horizon less than 10 years or so, a dissolution should go into the projection as well, cuz this event has varying taxability depending upon entity, asset mix, etc. Just a simple income statement projection can be done in a few minutes on excel. And of course Kendrick should bill for the time! I have 2 clients in particular who are 1-man corps, who each go over $25,000 in medical expenses every year (both due mostly to out-of-pocket psychotherapy costs). For them it is a no-brainer to be taxed as a C. My wife and I have chronic conditions which also makes it a no-brainer for my business. Our out-of-pocket is always over $5,000 per year. | |
