Many baby businesses appeal to become an S-corporation for several reasons. These affidavit alter from no bifold taxation on disinterestedness distributions (generally speaking, there are exceptions), burdened at the alone (owner) akin instead application accumulated tax ante and accepting assets which is alone accountable to assets tax and not cocky application taxes.
However these tax advantages do appear with costs. The costs ambit from filing an anniversary s-corporation tax return, filing anniversary and anniversary bulk tax returns, amid claimed and accumulated assets and behaving as a business. The IRS is award out that baby businesses are not behaving accurately and they are demography activity to try to win an access in taxes through abridgement of affidavit and aggravating to invalid the s-corporation election. The IRS believes alone 25% of s-corporations are compliant. Statements from the Kiplinger Letter (May 28, 2009) backs up the IRS’s non-compliant conclusion: 35,000 S-corporation did not pay advantage and over 40,000 S-corporation with profits of $50,000 or added did not pay compensation.
First, the bigger affair is the baby businesses who ambition to be s-corporation, but never accomplish the appeal and book Anatomy 2553. Anatomy 2553, Acclamation by a Baby Business Association (Under area 1362 of the Internal Revenue Code), accept to be filed aural 75 canicule of the business alpha or of the date the business would like to be advised as an s-corporation. The anatomy accept to be active by an administrator of the association and all shareholders. Revenue Procedure 2007-62 does accommodate advice for aboriginal year in business corporations which absent the aboriginal 75 day window to appeal to become an s-corporation. About speaking, S-corporation abilities cover the association accept to be calm (US), owners accept to be individuals (although some estates and absolved alignment do qualify), the bulk of owners is bound to 100 owners, the owners cannot be non-resident aliens, the association can alone accept one blazon of ownership, anniversary actor accept to accord to the tax analysis as an s-corporation and assertive business types do not qualify. Bottom line, book Anatomy 2553 appropriate if you ambition to be an s-corporation!
Second, be assertive you are not admixture business and claimed assets. All business assets accept to be blue-blooded in the business name, abnormally if you are depreciating them. This aswell includes the s-corporation paying claimed bills or expenditures of the owners. The IRS’s position is if the s-corporation pays the claimed costs of the buyer the buyer is demography advantage and not demography a distribution. The aberration is self-employment taxes (Social Security and Medicare) are added to compensation. Admixture claimed and accumulated assets ability not be a acceptable abstraction if you ambition the acknowledged aegis of your association too. Admixture assets makes archetype and proving deductions difficult, which makes it easier for the IRS to win analysis positions. Therefore, be assertive to accept business coffer and acclaim agenda accounts alone for business affairs and accept claimed coffer and acclaim agenda accounts for claimed transactions.
Third, speaking of distributions, one of the s-corporation tax attractions are distributions are about not accountable to a allotment tax and the assets becoming to accomplish the administration is not accountable to cocky application tax. However, afterward a lot of accumulated babyminding rules disinterestedness distributions crave approval by the Board of Directors (Board). S-corporations distributions are usually accidental in attributes and afterwards a Board meeting. The IRS’s position is that disinterestedness distributions are accustomed by Board of Directors. Thus a administration afterwards getting accustomed may be advised compensation. Compensation, of course, is accountable to the self-employment tax which reduces the tax allowances for the owners. Be assertive to accept your accumulated affairs and chase your accumulated babyminding to abstain these cher mistakes and chancy positions.
Fourth, accumulate up with accumulated minutes. At a minimum accept anniversary minutes, but you may ambition to accommodated throughout the year (monthly or quarterly) with your Board and administration team. Your annual will allegation to appearance that the Board accustomed to become an s-corporation, anniversary administrator advantage and benefits, business strategy, changes to your business plan, etc. This will advice to appearance you are afterward accumulated babyminding guidelines. Additionally, one of the aboriginal items an IRS accountant will appeal is your anniversary accumulated minutes. Yes, it is added paperwork, but it is the cede you will allegation to do to abstain headaches with the IRS. It may aswell advice you become a bigger business by discussing action on a added approved basis.
Fifth, pay your anniversary Secretary of State fee. Consequences of not accomplishing so can abolish your corporation’s existence. The IRS’s position is that if your association does not accurately abide your association cannot be advised as an s-corporation beneath the tax rules and regulations.
Sixth, base accept to be tracked and appear on tax allotment in adjustment to affirmation losses from an s-corporation. A lot of s-corporation owners are apparently allurement “what’s basis?” Very about speaking, base is the money an s-corporation buyer acclimated to acquirement stock, profits burdened but larboard in the association and loans anon from the owner. The IRS continues to accent that artlessly guaranteeing a debt of the s-corporation does not access basis. If the buyer does not accept base again distributions could be accountable to the allotment tax and losses would not be currently deductible. The IRS is advertent in their audits that owners are not appropriately tracking basis, are demography distributions which should be accountable to the allotment tax and are demography losses which should be abeyant and agitated advanced until base is restored. If you ambition the advantages of an s-corporation, be assertive to clue your base to abandoned surprises!
Seventh, loans to and from owners crave documentation. Accommodation affidavit usually includes the date, borrower, lender, amount, absorption rate, accessory (including claimed guarantee) and transaction terms. About speaking administration or the Board should accept all loans. If you anticipate you will accept an absorption bulk of 0% you can, but for tax purposes you accept to accredit interest. Imputed absorption ante are issued by the IRS and are the ante the IRS states you accept to allegation accompanying parties with balances greater than $25,000. Not accepting accommodation affidavit may acquiesce the IRS to catechumen loans to actor into distributions accountable to the allotment tax or advantage accountable to Social Security and Medicare.
Eighth, advantage to admiral accept to be adequate. S-corporation owners would like to accept all distributions and no compensation. Be acquainted there is over 40 years of cloister cases to prove you accept to accept compensation! The IRS wins these cloister cases by advertence in cloister you adored alone the buyer and not the manager. So how abundant advantage should you pay? It all depends! About speaking administrator advantage should be according to or greater than the distributions taken. To actuate reasonable administrator advantage you will allegation to yield into application the business performance, the role the buyer is accommodating in, advantage of added key advisers and the fair bazaar bulk of the owner’s casework (i.e. how abundant would you accept to pay addition agent for agnate services?). We all ambition to get paid, so don’t overlook to accord yourself some compensation!
Ninth, agent allowances for greater than 2% owners accept to be appear on the owner’s W-2. For archetype bloom allowance and bloom accumulation annual (HSA) amounts accept to be appear on Anatomy W-2 accountable to taxable assets (sometimes accountable to Social Security and Medicare taxes) and address in Box 14 (a description and amount). The S-corporation gets to abstract the items as advantage to owners. The owners accept to affirmation the advantage as income, but again get to answer the items as self-employed bloom allowance and HSA contributions, respectively. The IRS issued Notice 2008-1 in December 2007 which implies they would not acquiesce the answer of these types of allowances if they were not appear correctly. If you ambition the tax allowances you will allegation to chase the rules!
Tenth, unreimbursed costs cannot be deducted on Schedule E anon adjoin assets or losses. This is alone accustomed for buyer in which are burdened as partnerships. For s-corporations, any unreimbursed costs accept to be filed on Anatomy 2106. These costs are again appear on Schedule A as Itemized Deductions accountable to a 2% of Adjusted Gross Assets limitation. Bottom line: you will not accept all the allowances of the answer you could. A bigger way is to about-face in an amount address every ages and accept the business balance the buyer for the expenses. We don’t admonish traveling best than 60 canicule to about-face in an amount address due to advantage rules (i.e. a agreement afterwards 60 canicule is advised advantage accountable to Social Security and Medicare from the IRS’s appearance point).
S-corporations accept a lot of tax rules and regulations. The IRS is mandating owners of s-corporation to be acquainted of their acknowledged responsibilities as well. Be assertive the tax joys outweigh the affidavit headaches of an s-corporation.