Posts Tagged ‘s corporation’

For 2010 only, medical insurance premiums paid by self-employed individuals, including partners with self-employment income, can be deducted from self-employment income to reduce social security and Medicare taxes.

This creates a significant benefit for those with self-employment income of $106,800 or less. When self-employment income exceeds $106,800, the additional Medicare tax gradually consumes the savings.

There is another development in this area that is not new, but is turning out to be an implementation nightmare.

In 2008, IRS changed the rules under which partners in partnerships and S corporation shareholders could take the self-employed medical insurance deduction. This change was implemented because audits were revealing that frequently the deduction was taken twice; once at the entity level and again at the individual level.

We will use an example of a $10,000 medical insurance premium to illustrate this issue. Here’s what was happening:

This is a bit too complex to cover in a blog post so we provide a complete discussion on our website under “Articles of Interest”.

Greater than 2% S corporation shareholders must be diligent to make sure that the corporation’s payroll properly reflects this medical insurance on the W-2. Read the article on our website for a thorough discussion with examples.

When in doubt, always confer with your professional tax preparer or CPA.

Links:

Articles of Interest: http://www.politoeppich.com/article_pdfs/9-Partnership%20and%20S%20Corporation%20Health%20Insurance%20Premiums%20LH.pdf 

Tax preparer: www.politoeppich.com

For many years the penalty for failure to file a federal partnership return was $50 per partner per month for a maximum of 5 months. Over the last couple of years, similar penalties have been extended to S Corporations, and the penalty rates have been creeping up.

The current federal penalty rate is $89 per partner or shareholder per month for a maximum of 12 months. The Worker, Homeownership, and Business Assistance Act of 2009 includes a provision to increase the penalty again. The new penalty rate will be $195 per partner or shareholder per month for a maximum of 12 months for a tax year beginning after December 31, 2009. The maximum penalty now will work out to $2,240 per partner or shareholder. This provision is projected to raise over $1.2 billion over the next 10 years.

Recently signed California legislation, SB 401, also increases the partnership late filing penalty and adds a new late filing penalty for S corporation returns. The FTB assesses the late filing penalty if a partnership or LLC, treated as a partnership, files a late or incomplete return. The current late filing penalty is $10 per partner, for each month or fraction of the month the return is late or incomplete, to a maximum of five months. Beginning with returns required to be filed after January 1, 2011, the penalty will increase to $18 per partner or shareholder for a maximum of 12 months.

Up to now, I’ve covered sole proprietorships, general partnerships and limited liability companies (LLC).  Now let’s talk about S-Corporations.  The majority of our clients are S-Corporations.  I’d imagine that CPAs favor S-Corporations like lawyers favor LLCs.  It’s not the perfect entity, but we see advantages over the other entities for most privately held businesses.

In general, S-Corporations and C-Corporations have many of the same advantages and disadvantages. There are some very distinct differences you’ll need to consider.  We’ll focus on S-Corporations for today’s post and C-Corporations in part 5.

ADVANTAGES:

• Continuity of life – by operation of law the entity has an infinite life.  It is not dependent on its shareholders.
• Transferability – generally shareholders are free to sell or transfer their ownership interests at will as long as there is a willing buyer or transferee.
• No double taxation – an important difference from the C-Corporation; profits and losses flow through to the shareholders – and NO self employment tax! (Reader beware – Congress is trying to change the self employment tax part…)
• No liability – generally, shareholders do not have personal liability for the business’s obligations. Owners are only at risk for their investment.
• Bankruptcy – entity can file for bankruptcy.
• Distributions – shareholders can take distributions tax free, though they pay tax on their proportionate share of profits.

DISADVANTAGES:

• Complexity – forming a corporation is nearly as complex and expensive as an LLC or LLP.
• S-Corporation limitations –
  • No more than 100 shareholders allowed
  • Shareholders must be individuals, estates or certain trusts
  • Must be a domestic corporation
  • Generally only one class of stock allowed
  • All shareholders must be US residents or citizens
  • Formalities – once formed, there are certain formalities that should be followed.
  • Asset distributions – assets taken by shareholders must be removed at fair market value which can create a taxable transaction.
  • Shareholders have no management rights – Shareholders elect the Board of Directors who elect the officers.  The officers manage the corporation.
  • Dissolution – unwinding generally involves a taxable transaction

See a professional when making these decisions. Every situation is unique and must be considered separately.