Stuart Bronstein <spamtrap[at]lexregia.com> writes:

- quote -

Ah -- that makes sense.

--
Rich Carreiro rlc-news[at]rlcarr.com

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Rich Carreiro wrote:
- quote -

Ahah. Now here's how IRS defines what constitutes
"services' in such a case "Personal services. Personal
services include any activity performed in the fields of
accounting, actuarial science, architecture, consulting,
engineering, health (including veterinary services), law,
and the performing arts."

Looks like an S corporation would get around this.

- quote -

Just how despicable IS that section 1706?
IOW, what does it say? (grin)

ChEAr$,
Harlan Lunsford, EA n LA

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Rich Carreiro <rlc-news[at]rlcarr.com> wrote:
- quote -

Economically, we would take the position that the
corporation could hire someone to do the job instead of the
owner. That new employee would be paid less than the total
income, as the owner is going to want some level of return.
The new employee would take less than the total income
because, if they could make the total income, they wouldn't
be an employee in the first place.

More realistically, we know that a 0 payroll is not
acceptable. The US Supreme Court has so ruled. We know the
IRS would like all payroll to be 100% of the net earnings.
ANYTHING in between is a gray area, and is subject to
challenge. Without any economic argument whatsoever, we have
over the past three years established a floor of 25% of
income before payroll as a comfort zone. We don't believe
the Service is going to bring a case with facts anywhere
near that in the S setting. To do so would be to establish a
new floor, which would ultimately lower revenues.

Congress is aware of this issue, as is the Service. There
have been proposals floated to close the opportunity. If one
of those proposals becomes law, we will immediately be
talking to our clients and re-evaluating their positions.
Until then, those clients who are comfortable with this
level of risk and see the savings as worthwhile are taking
advantage of the opening.

--
Bruce Davidson Cantor, CPA, JD
Admitted in Colorado

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Rich Carreiro <rlc-news[at]rlcarr.com> wrote:
- quote -

In our opinion, that's a PSC.

- quote -

Which is what? According to my materials, Code Section 448
was added by Section 801 of the '86 Tax Act. Further, C
Corps are the only entities subject to the PSC regime. To
avoid PSC taxes, some professionals specifically elect S
status.

--
Bruce Davidson Cantor, CPA, JD
Admitted in Colorado

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Rich Carreiro <rlc-news[at]rlcarr.com> wrote:
- quote -

If the income of an S-corp shareholder is greater than a
"reasonable amount" that would be paid to a regular employee
who could have done the job, the excess does not have to be
recognized as salary subject to self-employment taxes. A
lot of the time there would be little or no savings. But
for a very successful business it could make a bigger
difference.

Stu

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Harlan Lunsford <hnslunsford[at]bellsouth.net> writes:

- quote -

Good question. Software engineering consultant.

--
Rich Carreiro rlc-news[at]rlcarr.com

Moderator:
C-Corps are one way around the arbitrary, capricious, and
dispicable Section 1706 of the 1986 Tax Act.

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Rich Carreiro wrote:

(snchipped...)

- quote -

And Rich, you've piqued MY interest, now. As one who has a
lot of clients with S corporations, ... advocates the
virtues of S corporations, and who operates that way
myself, just what is the value of X above? (grin)

ChEAr$,
Harlan Lunsford, EA n LA

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bc <cantor2[at]ix.netcom.com> writes:
- quote -

You've piqued my interest.

Out of curiousity, is your rationale economics-based (i.e. a
theory about the nature of the income the owner-employee is
earning and the services he provides to the corp that
support only some of profit coming out as wages) or is it
empirically-based (i.e. history shows the IRS doesn't
challenge S-corp dividends of less than X% of profits, so
take an X% of profit dividend), or a mix?

--
Rich Carreiro rlc-news[at]rlcarr.com

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Rich Carreiro wrote:

- quote -

Question. This one woman corporation wouldn't happen to be
in a profesion that might be subject to the PSC rules, eh?

ChEAr$,
Harlan Lunsford, EA n LA

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Rich Carreiro <rlc-n...[at]rlcarr.com> wrote:

- quote -

One of the biggest factor for a new venture: as a C-Corp, if
it's not profitable, you can't claim the loss--the loss does
not pass thru to the owner's individual return.

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"Rich Carreiro" <rlc-news[at]rlcarr.com> wrote:

- quote -

There are different issues with each type of entity.
Each has its advantages & disadvantages.
Facts & circumstances will help decide which is most
appropriate for your situation. You should consult your
CPA/tax advisor to help determine which one works best for
you.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] > > -----> real address on hobokeni or hobokenx <-----

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Rich Carreiro <rlc-news[at]rlcarr.com> wrote:

- quote -

We've never bought into this argument.

- quote -

Because of the above, this becomes a factor for our clients.

- quote -

If the corporation isn't close to zero before taxes, you
will pay a second tax to get the money. It can be dividend
double taxation or it can be FICA and income taxes, but
there will be a second tax.

- quote -

The only fringe we've found worth discussing is medical
reimbursement plan. If your relative has young children, or
significant out of pocket medical expenses this can make the
payroll issue work.

- quote -

It shouldn't cost any more to set up than an S-Corporation,
isn't any more complicated than any other business entity,
has no higher compliance or filing cost than any other
business and works well in the appropriate circumstances. If
the business is not a personal services corporation, it can
also use a fiscal year, which allows for income games.

The only additional expense we've consistently seen is the
year end meeting which has to be detailed in order to make
the corporate taxes minimal. There are some state issues,
but not as many as you might think.

--
Bruce Davidson Cantor, CPA, JD
Admitted in Colorado

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Rich Carreiro <rlc-news[at]rlcarr.com> wrote:

snip
- quote -

The author is probably right but in reality many pay only
part as wages and part as distributions.

- quote -

The author is assuming that the C-corp will be on top of its
accounting enough to zero out profits at year-end. Many
small business owners don't even know their bank and credit
card balances.

- quote -

Currently the qualified dividend break is scheduled to
expire. I also seldom see a successful consultant dropping
into a lower bracket. It does happen though, especially
when rates are cut. Besides the "bonus the profit" out
method takes care of the problem if done correctly.

- quote -

Mostly this is true. In some areas a solo will still not
get a benefit. For example for a dependent care plan the
owner cannot receive more than 25% of the benefits.

- quote -

I don't think it will typically be more complex to setup
than an S nor should compliance costs vary that much. It
will be the planning that adds to the expense either in time
or money or both.

--
Drew Edmundson, CPA
Cary, NC

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A close relative is giving consulting a try. For now she's
operating as a vanilla sole proprietor to minimize the red
tape until she decides if it's going to work out and be
sustainable/profitable. If she decides it does, she'll
certainly talk to a lawyer and a tax pro before messing with
entities. But in the meantime we're trying to get some
perspectives on different forms of business.

The most common info one tends to read seems these days to
recommend operating as a sole prop, as an S-corp, or as an
LLC that chooses to be taxed as a sole prop or an S-corp.

However, the other day we were reading an interesting book
by Nolo Press on business structure that made some pretty
interesting arguments for a one-man operation organizing as
a C-corp instead of an S-corp (if you're not going to be a
sole prop or disregarded entity).

Some of the author's arguments:

* For a one-man operation, an S-corp doesn't give much of a
chance to avoid payroll taxes because pretty much all the
profit has to be taken as wages.

* For a one-man operation, the double-taxation a C-corp
brings into play can be made mostly irrelevant if most/all
of the profits are taken out as wages, making a C-corp no
worse than an S-corp if you go that route.

* However, with a C-corp you have the option to not take out
all profits as wages. The remainder will indeed be taxed at
the corporate level, but then this gives higher bracket
people the ability to split their business income between
themselves (as wages) and the corporation (as corporate
profits) and get the first $50,000 of corporate profits
taxed at only 15%. While those profits will eventually be
subject to a second tax when they ultimately come out, that
can be deferred indefinitely, may be at a low rate (as
qualified dividends), or can be paid out as wages in years
when you are personally in a low bracket.

* A C-corp gives full fringe benefit flexibility, allowing
access to plans and fringes that are disallowed to sole
proprietors or to S-corp owners.

On the downside, it's also more complicated, may subject you
to state corporate minimum taxes, may cost more to set up,
have higher compliance and filing costs, etc.

Comments?

--
Rich Carreiro rlc-news[at]rlcarr.com

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