Now that more individuals are contemplating opening a business than just five years ago, enrolled agents and any other registered tax return preparer who wish to capitalize on this trend, by courting small businesses as clients, should brush up on the tax advantages of the S Corp election. As one of the most popular business entity types, the S Corp election is a subject covered on the EA examination and dealt with on an ongoing basis through tax CPE, enrolled agent continuing education courses. However, it is important from time-to-time to recap the fundamentals of S Corps, particularly the tax advantages of this election.
This article isn't going to talk about those differences. Instead, we're going to discuss what can trip you up and precipitate an IRS audit, how valuable a good CPA can be, what to do if you screw up (or worse, lie) on your business taxes and bring the Feds to your door and, finally, what you need to do for your employees. The IRS has 14 PDF files in their "Recommended Reading for Small Businesses" section, totaling over 600 pages. It recommends that you read them all. But if you don't read anything else, find and read at least the following: P1635 - Understanding EIN P1779 - Contractor or Employee? P587 - Business Use of Your Home P583 - Starting a Business and Keeping Records P334 - Tax Guide for Small Businesses P505 - Tax Withholding and Estimated Tax P535 - Business Expenses P15 - Employers' Tax Guide
Although it is sometimes argued that the double tax can just as easily be averted by not paying current dividends, this argument disregards two important issues. * First, the C-Corp. is subject to a potential accumulated earnings tax if it amasses more than $250,000 of retained earnings ($150,000) for personal service corporations. * Second, most all corporate owners anticipate receiving their share of a corporation's retained earnings when they opt to "cash in" by selling or merging the corporation. Because buyers typically wish to purchase assets as opposed to stock, the proceeds of these transactions generally flow through the corporation, where they are taxed prior to being distributed as dividends subject to a second tax.
How much does an audit cost? Diane Kennedy, author of Smart Business, Stupid Business, says, "you can count on paying $5,500 in extra taxes. And that's before you count penalties and interest and accounting and legal fees," which Kennedy says make the real cost closer to $8,000. Kennedy also says that the chances of being audited are 1 in 3 for sole proprietorships, but only 1 in 100 for S corporations. Large corporations can much more easily afford to fight an audit. The National Small Business Association claims that "the IRS is preying on those least able to defend their businesses, and giving large corporations a pass. In 2007, IRS audits of the nation's largest corporations plunged to its lowest level in the past 20 years." The NSBA also say that the IRS learned that "a far easier way to raise tax revenue is to target small-business owners who may not have the resources to defend themselves."
Another advantage of the S-Corp treatment lies in utilizing corporate net operating losses. Subject to certain complex requirements, a shareholder would be positioned to potentially offset S-Corp. losses against personal taxable income from other sources. Thus, the shareholder could capitalize on the time value of money by leveraging these losses sooner than might be feasible were the company a C-Corp. The rule of thumb is that shareholders mush have sufficient "basis" in the S-Corp. to leverage losses to offset other forms of income.
Avoid these, and you should reduce the chance of being audited. You can never eliminate that chance, because a perfect tax return will be suspicious, too (who files perfect taxes?) A good CPA is essential. If you aren't an accountant - and the fact that you're reading this article indicates that you probably aren't - you don't deal with tax and accounting issues all day. Unless you deal with them all day, you probably won't have the kind of in-depth understanding of these issues that a CPA has. And even if you know what the rules are, you might be guessing at how the IRS wants you to apply them. So get a good CPA and talk to them regularly. It's a relationship worth investing in. If you think you want to enlist the services of a tax preparation company, that's probably not going to work for you. Tax preparation companies that handle individual tax returns are generally not equipped to handle business taxes. Whomever you get to handle your taxes, help them as much as you can. The easier you make your tax preparer's job, the more time and attention they'll devote to getting your taxes right instead of chasing you for information, the less likely they are to make errors that can cost you money.
Taxpayers donating items worth more than $5,000 are also required to complete Section B of Form 8283. The IRS also typically requires these individuals to attached an appraisal of the donated items that has been conducted by a qualified appraiser.
If you prepare your own taxes and you screw up and catch it, file an amended return as soon as possible. If you don't, there's a chance that the auditors will be heading your way. If you flat-out lie on your taxes and get caught, there'll be heavy fines and maybe even jail time in your future. The IRS isn't evil. It doesn't spend 8 months of the year hatching Machiavellian plots to catch taxpayers out in the other 4 months. They just want to make sure that all the money the government said it needed to run the programs outlined in the budget get collected. And that means they're actually (gulp!) patriots (seriously.) And all they ask from you is honesty and diligence. Your employees don't expect much from you at tax time. Really, it's simple: 1. Make sure you've paid your employees' payroll taxes throughout the year. 2. Make sure your employee records and documentation are up to date. 3. Send them accurate tax statements - W2 for employees, 1099 for contractors. 4. Stay in business. Do your taxes right and that will help a lot.
This article isn't going to talk about those differences. Instead, we're going to discuss what can trip you up and precipitate an IRS audit, how valuable a good CPA can be, what to do if you screw up (or worse, lie) on your business taxes and bring the Feds to your door and, finally, what you need to do for your employees. The IRS has 14 PDF files in their "Recommended Reading for Small Businesses" section, totaling over 600 pages. It recommends that you read them all. But if you don't read anything else, find and read at least the following: P1635 - Understanding EIN P1779 - Contractor or Employee? P587 - Business Use of Your Home P583 - Starting a Business and Keeping Records P334 - Tax Guide for Small Businesses P505 - Tax Withholding and Estimated Tax P535 - Business Expenses P15 - Employers' Tax Guide
Although it is sometimes argued that the double tax can just as easily be averted by not paying current dividends, this argument disregards two important issues. * First, the C-Corp. is subject to a potential accumulated earnings tax if it amasses more than $250,000 of retained earnings ($150,000) for personal service corporations. * Second, most all corporate owners anticipate receiving their share of a corporation's retained earnings when they opt to "cash in" by selling or merging the corporation. Because buyers typically wish to purchase assets as opposed to stock, the proceeds of these transactions generally flow through the corporation, where they are taxed prior to being distributed as dividends subject to a second tax.
How much does an audit cost? Diane Kennedy, author of Smart Business, Stupid Business, says, "you can count on paying $5,500 in extra taxes. And that's before you count penalties and interest and accounting and legal fees," which Kennedy says make the real cost closer to $8,000. Kennedy also says that the chances of being audited are 1 in 3 for sole proprietorships, but only 1 in 100 for S corporations. Large corporations can much more easily afford to fight an audit. The National Small Business Association claims that "the IRS is preying on those least able to defend their businesses, and giving large corporations a pass. In 2007, IRS audits of the nation's largest corporations plunged to its lowest level in the past 20 years." The NSBA also say that the IRS learned that "a far easier way to raise tax revenue is to target small-business owners who may not have the resources to defend themselves."
Another advantage of the S-Corp treatment lies in utilizing corporate net operating losses. Subject to certain complex requirements, a shareholder would be positioned to potentially offset S-Corp. losses against personal taxable income from other sources. Thus, the shareholder could capitalize on the time value of money by leveraging these losses sooner than might be feasible were the company a C-Corp. The rule of thumb is that shareholders mush have sufficient "basis" in the S-Corp. to leverage losses to offset other forms of income.
Avoid these, and you should reduce the chance of being audited. You can never eliminate that chance, because a perfect tax return will be suspicious, too (who files perfect taxes?) A good CPA is essential. If you aren't an accountant - and the fact that you're reading this article indicates that you probably aren't - you don't deal with tax and accounting issues all day. Unless you deal with them all day, you probably won't have the kind of in-depth understanding of these issues that a CPA has. And even if you know what the rules are, you might be guessing at how the IRS wants you to apply them. So get a good CPA and talk to them regularly. It's a relationship worth investing in. If you think you want to enlist the services of a tax preparation company, that's probably not going to work for you. Tax preparation companies that handle individual tax returns are generally not equipped to handle business taxes. Whomever you get to handle your taxes, help them as much as you can. The easier you make your tax preparer's job, the more time and attention they'll devote to getting your taxes right instead of chasing you for information, the less likely they are to make errors that can cost you money.
Taxpayers donating items worth more than $5,000 are also required to complete Section B of Form 8283. The IRS also typically requires these individuals to attached an appraisal of the donated items that has been conducted by a qualified appraiser.
If you prepare your own taxes and you screw up and catch it, file an amended return as soon as possible. If you don't, there's a chance that the auditors will be heading your way. If you flat-out lie on your taxes and get caught, there'll be heavy fines and maybe even jail time in your future. The IRS isn't evil. It doesn't spend 8 months of the year hatching Machiavellian plots to catch taxpayers out in the other 4 months. They just want to make sure that all the money the government said it needed to run the programs outlined in the budget get collected. And that means they're actually (gulp!) patriots (seriously.) And all they ask from you is honesty and diligence. Your employees don't expect much from you at tax time. Really, it's simple: 1. Make sure you've paid your employees' payroll taxes throughout the year. 2. Make sure your employee records and documentation are up to date. 3. Send them accurate tax statements - W2 for employees, 1099 for contractors. 4. Stay in business. Do your taxes right and that will help a lot.
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