ge <e_c_l_e_s[at]a-znet.com> wrote:
[snip]
- quote -

IRC 106 would make these into tax-favored fringes *if* you
were considered an employee of the S corporation. As a 2% or
more owner, you are *not* an employee of an S corp. for that
purpose, you are a partner: IRC 1394. As a partner, such
fringe benefits are taxable to you. Bummer.

--
Chris Green

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Actaully these items are fully deductible by the S
corporation, just the same as for non-shareholder employees.
However, benefits provided to the 2% or greater shareholder
employee are *taxable benefits* and must be added to the
W-2. They are subject to income tax, but are NOT considered
FICA wages. The amount added to the W-2 for employer paid
health insurance can be deducted by the employee as Self-
employed health insurance on his 1040. Amounts for other
taxable benefits may be treated as schedule A medical
expense to the extent that they would have been deductible
there if paid by the employee.

The difference in nondeductible expense and taxable benefit
may not seem much different if you have only one
shareholder, but if you have more than one, the difference
in treatment can make a big difference. For example, if you
have two shareholders, A who owns 80% of the stock and B who
owns 20%. A put up capital, but doesn't work in the
business, while B is the "know-how" guy, works full time,
and has employer- paid health ins of about $10,000 per year.
The economic benefit goes to B. Disallowing the deduction
at the corporate level would unfairly penalize A, as he
would lose an $8,000 deduction that he economically
incurred. The correct answer is to deduct the $10,000 at
the corporate level and add it to B's W-2. B can deduct it
as S/E health insurance on his 1040.

The difference can also have implications for how much of a
retirement plan contribution can be made, as a bigger W-2
can allow a bigger retirement plan contribution, depending
on the plan's definition of compensation.

Brian Bivona, CPA

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- quote -

Are you sure? I've been told that, under IRC 106, you can
set up a benefit plan that includes coverage of
out-of-pocket medical expenses.

- quote -

I shall, and already had. However, I like to cross-check
things I'm told. Some people - even professionals - are
more 'aggressive' WRT taxes than others might be. For
instance, your answer re benefits contradicts what I was
told by the professional I talked to. I don't take either
as gospel, it just means I need to look into it more.

Thanks,
George

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- quote -

Well, for starters, you cannot deduct fringe benefits as an
S Corp for more then 2% stockholders. They include medical
expenses, etc. Group health insurance for an owner is a K-1
item not deductible by the S-Corp. You need to be a C-Corp
to do that.

Expenses prior to incorporating are not deductible by the
corp. the clock starts at zero when you incorporate. So, you
still use the schedule C for expenses unpaid at
incorporation.The same thing goes for income earned prior to
incorporating.

You shoudl get some professional advise prior to finalizing
your plans to insure the proper timimg and method of
formation of your business.

Bruce Raskin, CPA
Small Business and Individual Tax and Accounting Services

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I have been a sole proprietor for 10 years. I am
considering switching to an S-corp, in the understanding
that I could create a benefit plan that lets me cover my
insurance and other medical expenses as a business expense,
and thereby reduce my FICA payments. (thread:
"self-insurance deductible?")

If I was to start the S-corp now (like, September), ...

1. I have received income and paid expenses this year, prior
to incorporation. Can I treat these as corporate income and
expenses? (I suspect not, but thought I'd ask.)

2. I have outstanding invoices that haven't yet been paid.
If these are paid after incorporation, can that be counted
as corporate income?

3. My understanding is that the S-corp has to pay me a
"reasonable" salary. There's a good chance that I won't get
a lot more work the rest of this year. So, I'll have income
from work already done, but not many hours 'worked' after
incorporation. If so, would a "reasonable" salary be based
on the actual hours I work, or on the hours I worked prior
to incorporation to producing the payment that will be
received after incorporation?

TIA,
George

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