Harlan Lunsford wrote:
- quote -

Too bad he isn't paying you then.

Stu

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Arthur L. Rubin wrote:
- quote -

Well, if he were paying me, I'd say "within 75 days".......!

(grin

Cheer$,
Harlan Lunsford, EA n LA
just returned from training

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irvngbela[at]aol.com (IB) wrote:

- quote -

Depending on the business, what is often recommended is to
use an S corporation when the business is new and more money
is going out than coming in. In that way you can take
personal advantage of the business deductions. When the
company starts to make a profit, that's when it's often
recommended to switch it to a C corporation.

Stu

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irvngbela[at]aol.com (IB) wrote:

- quote -

And this high-powered attorney "forgot" to tell you how and
when to elect S status. I might "forget" to pay his bill
for a little while <G> .

snip

- quote -

Dealing with these now with respect to C rather than S
corporation ...

- quote -

Any net income that you leave in the corporation, after
operating expenses and your salary, will be taxed at the
corporate level and then taxed again if and when it is
distributed to you in the form of a dividend. To avoid
that, you want to set your salary at a level that will
effectively zero out the corporation's income.

The IRS's interest in sole stockholder salaries in a C
corporation is the opposite of its interest in an S
corporation. In an S corporation, IRS is concerned if the
salary is too little, because they want the employment
taxes. In a C corporation, they're concerned if it's too
big. Why? Because if you take excessive salary out of a C
corporation, you're avoiding the double tax on the
corporation's earnings.

In your case, it appears that the corporation's gross
receipts will all be derived from your personal services.
Therefore you are not likely to run into an excessive
compensation issue if you take salary to zero out the
corporation's income. (Of course you have to leave enough
cash in the corporation to pay its bills, etc.)

- quote -

Corporate net earnings (after deducting expenses including
your salary) are taxed to the stockholder as ordinary income
(dividends) when distributed.

Qualifying dividends (basically, dividends paid from income
that was subject to tax at the corporate level) from
domestic (US) corporations are taxed at a special 5% rate
for years beginning after 2002 and before 2008, and 0% in
2009.

- quote -

Nothing "flows through" from a C corporation.

- quote -

It's better if you set it up as a regular salary, so much
per month or half-month. Then at the end of the year you
can pay yourself a bonus based on the corporation's
performance to (close to) clear out the balance. Since
withholding is deemed to have been paid ratably throughout
the year, you won't risk a penalty for underpayment of
estimated taxes if there is a big chunk of withholding paid
near the end of the year.

Keep as much money in the corporation as it needs to pay its
expenses.

But don't go by anything we say here. Find yourself a
qualified tax adviser and follow his or her advice.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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irvngbela[at]aol.com (IB) wrote:

- quote -

Actually that's a FEDERAL rule. California just conforms to
it.

And it isn't three months; the election must be made by the
15th day of the third month of the taxable year. So if the
corporation was organized as of January 1, the election was
due March 15. IRC Sec. 1362(b).

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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IB wrote:

- quote -

I think you need to PAY an accountant. That's not
CA law, it's Federal law.

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I did go to an accountant and he suggested I set up a C
corporation. The second accountant I spoke to mentioned the
S designation.

I'm a C corp now. I'm still in the process of meeting
accountants based on recommendations.

Can you give me your opinion as to some of the new questions
I posted?

IB

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In reference to my questions above, please note that I'm not
an S corp, but a C corp. Please tailor your answers for a C
corp rather than an S corp.

For anyone interested, it turns out that in CA you must
declare you're a S corp within 3 months of incorporating.
If you don't, you're a C corp for that year.

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irvngbela[at]aol.com (IB) wrote:

- quote -

It's time to give that idea up. From here on you need
professional help.


- quote -

He wants to get paid, LOL. I'm sure you like to get paid
for your knowledge and skills; he'd like to be paid for his.
You'd be smart to pay him (or somebody). Free advice is
worth every cent you pay for it <G> .

- quote -

First, please understand that the total amount of taxable
income that will be ordinary income on your individual
income tax return from a profitable S corporation is the
same, regardless of how much or how little of it you take as
salary. The TAX difference in the salary-vs-K-1 issue is
EMPLOYMENT TAX - your salary is subject to Social Security
and Medicare taxes (half paid by the corporation, half
withheld from your salary); your distributive share of any
net income, after deduction of all expenses including your
salary, is not subject to employment taxes. That's why the
IRS requires an S corporation to pay a stockholder/employee
a REASONABLE salary for the services actually performed.
Otherwise, the tax dodge in an S corporation would be not to
pay yourself a salary at all, take all the S corp's earnings
on your K-1, and avoid the employment taxes.

So ... whatever you take as salary is subject to 15% (total)
employment tax, in addition to individual income tax. That
means you are motivated to make your salary as low as
possible and still be "reasonable." What is reasonable
depends on what the corporation is doing and what it uses
(real estate, machinery, copyrights, patents, the work of
other employees, your work, etc.) to do it with. If the
corporation's gross income is all derived from the sale of
your personal services (or the sale of scripts that you
personally wrote, without the help of other employees,
equipment, etc.), then most of its net income after
deducting other expenses should probably be paid to you as
salary and subject to employment taxes.

Another way to look at it is to consider how much you would
expect to be paid if you were doing the same work for a
third party. And you might have an idea of how much others
are paid to do the same kind of work as employees or
independent contractors for third parties.

I think most pros who post here would agree that the IRS
seldom questions stockholder/employee salary in an S
corporation unless there is NO salary, or the salary is
nominal in relation to the total net income. As long as you
make a reasonable stab at it you can be fairly aggressive
without getting into trouble (in other words, aim for the
low end of "reasonable" <G> ).

- quote -

They aren't. The corporation's net income, after deducting
all of its expenses and your salary, is taxed to you in the
year in which it is earned. It is not taxed when it is
distributed to you.

- quote -

Everything flows through to you for income tax purposes,
assuming you own 100% of the stock.

Let's do a little example. Suppose the corporation's gross
receipts for the year are $200,000. It has expenses (not
including your salary, but including the corporation's share
of employer taxes) of $50,000. It pays you a salary of
$10,000 a month ($120,000). At the end of the year the
corporation's net income is $200 - $50 - $120 = $30,000.

The $120,000 will be reported to you on a W-2, and income
taxes, Social Security, Medicare, and any other taxes (e.g.
state income taxes, city income taxes, state disability
insurance taxes, etc.) will be withheld from the cash you
actually receive each month. The $120,000 gross wages will
go on Line 1 of your individual income tax return.

The $30,000 will be reported to you on Schedule K-1. You
will report that income on your individual income tax return
on Schedule E.

You can withdraw that $30,000 in cash at any time, during
the year or after year end, without any income tax effect.
You'll pay the income tax on it whether you take it out or
not.

If you decided to pay yourself a salary of $150,000, you
would pay employer taxes on that entire amount, and your K-1
net income would be zero. If you only paid yourself $1,000
a month, or $12,000, you'd pay employer taxes on that
amount, and your K-1 income would be $138,000. The total
income that is taxable to you is the same in all three
cases: $120 + $30 = $150; $150 + $0 = $150; $12 + $138 =
$150. The only tax difference is the 15% employment tax on
the salary, which would be quite a lot different. (Actually
this example is oversimplified because if I factored in the
employment taxes, the actual bottom line WOULD be different
-- the higher the proportion of salary, the lower the total
net income. But I'm just trying to give you the general
idea.)

- quote -

The question of how much cash to leave in an S corporation
is purely a business question -- how much cash does the
corporation need to carry on its activities and pay its
bills?

If you don't take all or most of the corporation's income
out as salary, you will need to make quarterly estimated tax
payments to cover the income tax on your K-1 income (the
$30,000 in the example above). If you wait to pay it all at
the end of the year, you may be subject to penalties for
underpayment of estimated taxes. So the cash to pay your
estimated taxes has to come from somewhere, each April 15,
June 15, September 15, and January 15. It doesn't make any
TAX difference whether you take it out of the corporation or
from some other source of cash (e.g. your salary).

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice. \\\ From:
"Frank S. Duke, Jr." <dukefs[at]one.netSubject: Re: Deducting expenses for managing personal funds?
Newsgroups: misc.taxes.moderated
Approved: rdadams[at]smart.net
Distribution: world
Precedence: first-class
References: <10a89btch16vk30[at]corp.supernews.comOrganization: Posted via Supernews, http://www.supernews.com

AES/newspost <siegman[at]stanford.edu> wrote:

- quote -

Perhaps investment expenses subject to the 2% of AGI
limitation. Like tax prep fees, they are deductible but
most people don't really get any benefit from them.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

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irvngbela[at]aol.com (IB) wrote:

- quote -

It sounds as though you had a new corporation set up without
asking an accountant whether it was advisible or whether it
was the best form of doing business for you. Or whether it
would be better to use an S corporation or a C.

Frankly, I think that's foolish. Your decision was a
financial one, not a legal one. There are few lawyers who
are able to advise you adequately in that kind of situation,
though many lawyers think they know what it's all about.

Stu

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Thank you for your advice. It was well thought out and
cleared up some misconceptions I had.

First of all, my S corporation was set up by an attorney.
So don't worry, it's done correctly! I'm a screenwriter and
my attorney represents dozens of screenwriters and directors
who incorporate at some point.

I will go to an accountant but I'd like to know myself
what's going on. I'm used to doing my own taxes.

The accountant that initially answered my questions really
just wanted me to hand everything over to him at end of this
quarter. Like some professionals, he didn't really want to
answer questions in detail (unlike the answers you so kindly
offered.)

I believe you're right. He mixed C and S corp answers
because, at the time, I had not elected which I would
choose. (I chose S because of the medical deductions --
More on that later.)

I have some other questions:

1) What is the proper amount that should go to salary vs.
distributed earnings? I've seen various percentages on
this web-site based on "appropriate salaries." What's your
advice on this front.

2) How are distributed earnings taxed?

3) If all the corporations earnings (after salary, expenses,
distributions) "flow through" to me, what's left to flow
through? Or am I misunderstanding what you mean?

4) Is it better to take the money out of the corporation in
salary and distribution over the course of the year or
should I leave in as much as I can afford to and then take
it out at the end of the year so as to pay most of the taxes
in the last quarter? Or I am thinking about this all wrong!
(Though the corporation has plenty of recurring expenses,
I don't need to keep money on hand for inventory as you
asked.)

Thanks,
IB

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irvngbela[at]aol.com (IB) wrote:

- quote -

Is the guild membership required for or related to the
services you will be providing to the S corporation? If so,
then it would make sense for the corporation to pay it.
Otherwise it will be an employee business expense to you,
subject to limitation as an itemized deduction.

- quote -

The first thing you need to do is hire that accountant, or
another one, somebody to help you with this S corporation.
The questions you are asking lead me to suspect that you do
not understand how S corporations work. The S corporation
rules are fairly complex and there are many pitfalls.
Professional help will be worth the cost.

Actually I suspect that either you misunderstood the
accountant, or he misunderstood you and thought you had a C
corporation. It does make sense to "zero out" a
closely-held C corporation's earnings with salary, which is
deductible by the corporation, to avoid double taxation.
Distributions of earnings from a C corporation (dividends)
are not deductible by the corporation, and are taxable to
the stockholder.

With an S corporation, though, the corporation's net income
(after your salary) flows through to you on a Schedule K-1
and is reported on your individual income tax return. It is
only taxed once, for federal purposes, at the stockholder
level. (Some states impose entity-level taxes on S
corporations.)

An S corporation must pay its stockholder/employee a
reasonable salary for services. If all of the corporation's
gross income is earned by the performance of personal
services by the stockholder/employee, then most or all of
its net earnings (before stockholder salary) probably should
be paid out as salary ("zeroing out" the S corporation's
income). On the other hand, if the S corporation's income
is earned in part from sales of something other than
services, or from the use of property owned by the
corporation, then it makes sense for the corporation to
retain some net income. You'll still pay income tax on it,
but the difference is that only your salary is subject to
employment taxes (Social Security and Medicare).

There is no need to keep enough cash in an S corporation to
pay income taxes, because the income tax is paid by the
stockholder. If it were a C corporation, the accountant's
advice would make sense, since it would need to keep enough
cash to pay the corporation income tax.

- quote -

All of the S corporation's income is taxed to you in the
year it is earned, whether or not it is paid out to you in
cash. If the corporation doesn't need cash it has
accumulated in excess of your reasonable salary, just take
it out as a distribution, there is no tax consequence to
that. You don't need to take it as a loan.

Why not open a higher-earning savings account for the
corporation if it has excess cash that you don't want to
distribute out (because the corporation will need it to buy
next year's inventory, or whatever)?

Are you sure you have made a valid S election for your
corporation? I'd strongly advise getting some professional
help as soon as possible.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

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I have just set up an S corp and I have some questions. I
am the only employee of the S corp right now.

1) When I pay my dues for a guild I belong to, is that a
personal business deduction, rather than something that the
S corp pays directly?

2) An accountant I spoke to mentioned zeroing out the S corp
at the end of the year, except for monies left to pay taxes.
Why would I want to do this?

3) My S corp account hardly earn any interest. Is it worth
making out a loan to myself, so I can earn more interest on
that money and then give back the money at the end of the
year? (Of course, if I zero out the account, this doesn't
make much sense because I will end paying out the money is
salary anyway.)

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