Transform Your Business with S-Corporation Tax Strategies

Unlock the secrets to elevating your business's financial health with seasoned CPA, Eric Bonney, in a riveting discussion that could change the way you think about S-Corporations. Ever wondered if the time is ripe for your enterprise to make that strategic S-Election move? This episode serves up a wealth of knowledge, covering the substantial tax benefits and the perfect income threshold that could herald the right moment for your business's transition. As the founder of Harvest Tax and Accounting Services, I draw on over 28 years of experience to guide you through this potentially lucrative decision.

The complexities of an S-Corporation don't escape us in this engaging chat; you'll gain insight into the responsibilities that come with the status, such as reasonable compensation and shareholder eligibility. I'll also navigate you through the essential year-end reporting of health insurance premiums for significant shareholders—a critical move for maintaining compliance and reaping the benefits of your S-Corp status. Whether you're a sole proprietor ready to expand or a partnership eyeing a new tax structure, this episode is tailored to empower you with informed tax considerations that could steer your business towards a more prosperous future. Join us for an indispensable conversation that's less about bean counting and more about bean multiplying!

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Transcript

Speaker 1: 0:03

Welcome everyone to Espresso Tax and Small Business Essentials, where we are brewing up success for the owner-led entity by providing education on useful tax strategies and other essential business topics. I am your host, eric Bonney, founder of Harvest Tax and Accounting Services and a CPA with over 28 years of experience servicing business owners like yourself. Each week, I will take a look at the most pressing tax issues and business questions that small business owners are facing. Today we're going to discuss the S-Corporation and why and when it might be a good time to make an S-Election. So why would you want to choose to be taxed as an S corporation? The biggest benefit to being taxed as an S corporation is going to be because, as the business owner, you are no longer going to be subject to self-employment tax that is typically incurred if you have a different type of an entity, such as if you are a disregarded entity, if you're a sole proprietor or if you are a general partner in a partnership. When is the best time to make that decision is really going to be dependent on the facts and circumstances specific to your situation. Typically, in our firm, we'll have a threshold of income that we like to see from a sole proprietor or a disregarded entity that we would like to see them having on a regular basis to make sure that, after we make the S-election, that we aren't incurring additional fees and additional complexity without having enough of a tax savings For our firm. Typically, that's going to be somewhere in the $70,000 to $75,000 in net income on a regular basis, but every firm is going to have a different choice and a different time when they're going to make that decision. What are some of the downsides to making an S election and why might we not want to make an S election?

Speaker 1: 2:04

Well, there's already going to be some additional complexity depending on if you are already a disregarded entity or if you were a partnership and you're deciding that now you want to be taxed as a S corporation. That additional complexity is going to be that, as an active business owner, you are going to need to put yourself on what is called reasonable compensation. So if you did not already have payroll going on in your business, now you're going to need to have payroll. Whether you do that payroll internally yourself or you use an online or a local payroll company really, again, is going to be up to each individual, but you will need to make sure that you are paying yourself or any of the active business owners a reasonable compensation. Now that reasonable compensation does not need to be paid every week or every other week. The only stipulation is that by the time you get to the end of your calendar year or fiscal year, you must have some type of payroll that is paid in on a W-2 for the active business owners.

Speaker 1: 3:09

Some of the other downsides to an S-corporation are that there is a limitation to who can be a shareholder in an S-corporation Typically that has to be somebody that is a US resident or US citizen and there are limitations to the number of shareholders that an S-corporation can have, and that limitation is typically at 100 shareholders. Now, most of the partners that we deal with in our firm, they don't have that issue. But if that is going to be an issue or you think that you are going to be going out and bringing in some significant funding and that is going to require that the people coming in that are going to be making those contributions are going to be equity owners of the entity, then probably would want to have a conversation with your tax professional about a different vehicle outside of an S Inside an S corporation, if you've got a greater than 2% shareholder who is getting some type of benefits from the entity typically we're talking about health insurance benefits or if you have a vehicle that is inside the company that is being used by that particular owner, then that adds some additional complexity as well. If you have health insurance through the business, then you need to make sure that by the end of the year you have reported the insurance premiums that were paid for by the business on behalf of that greater than 2% shareholder. You need to make sure that you report that on your W-2 and make sure that you get that information over to your payroll provider in a timely fashion.

Speaker 1: 4:48

But, as I mentioned earlier, there are some significant savings that can be had if you do make the S-election because, outside of the owner's compensation that they get paid, everything else is going to come to the business owner, either in the form of a distribution from the S corporation, which is typically going to come to them in a tax-free method, or it is going to be reported to them on a K-1, and all of the income that is reported to the business owner on a Schedule K-1 is going to be not subject to self-employment tax and that is the additional 15% tax that you would be paying if you were either a general partner in a partnership or if you were a sole proprietor.

Speaker 1: 5:39

Filing a Schedule C S-corporations can be a very good tool to allow for better tax mitigation and better tax planning with your professional. I would highly encourage you to have a conversation with your tax professional to find out if the S-election and being taxed as an S-corporation is going to be in your benefit and if it would be something that would make sense for you to do. Thank you for joining me today for this episode of Espresso Tax and Small Business Essentials. Don't forget to sign up for our monthly newsletter and if you have a specific topic that you would like to hear me cover here on the show, please send me an email at espressotax at harvestcpafirmcom. There are links in the show notes for both the monthly newsletter and how to request a topic.