Type of Business

[Aproct]

tulsa lawn guy,

I have to correct you on one thing regarding the S-corp. If the an officer/owner decides to not take a payroll (which the IRS will make you take after a while) and takes a distribution instead, the distribution will be charged against the shareholder/owners basis in the company. THe distributions can be made tax free until all of the Sharreholder basis is used up, so ultimatley the owner would have zero basis in the company. Once that occurs that money distributed out to the shareholder will be considered a capital gain distribution and tax at the capital gains rate. So you have to be careful in taking money out of an S-Corp.

[dave_n_mulberry]

https://www.bizfilings.com/order2/calculator.asp?vendorid=B315

for filing on line

[work4green]

Does anyone know of a site that explains all these in better detail?

Thanks
Andy

[SodBuster]

Andy,

I'm a CPA and my green busineses are LLC's. Does that tell you anything?

[work4green]

Tells me I need to start driving to Gwinnett to have a talk with you...

I see you do Installation, what about maintenance, growing plants? Do you own separate businesses or are they divisions.

I still need to find a good site to read more about these just for my own understanding.

Does anyone have any pointers for looking for a CPA and Attorney familiar with setting up a business in the green industry?

Andy

[tulsa lawn guy]

Originally posted by Aproct
tulsa lawn guy,

I have to correct you on one thing regarding the S-corp. If the an officer/owner decides to not take a payroll (which the IRS will make you take after a while) and takes a distribution instead, the distribution will be charged against the shareholder/owners basis in the company. THe distributions can be made tax free until all of the Sharreholder basis is used up, so ultimatley the owner would have zero basis in the company. Once that occurs that money distributed out to the shareholder will be considered a capital gain distribution and tax at the capital gains rate. So you have to be careful in taking money out of an S-Corp.

Aproct,

Thank you very much for the information... I'm always game to learn something new! I do have a couple of questions though....

1. Could you please expand on the definition of "basis"?

2. I'm having a little difficulty completely grasping this concept... If I took out a salary of $25,000 from my corporation, I would pay tax based on my personal income tax rates as well as the 15.3% self employment tax right?

3. If I took the rest of the money ($75,000) out via using the distribution method, exactly what taxes would be applicable to this figure? What it really boils down to, is that I do not understand how the distributions get taxed...

Thanks for enlightening me!

[The landscaper]

Wouldnt www.IRS.Gov have all the info you could need

[tulsa lawn guy]

Originally posted by The landscaper
Wouldnt www.IRS.Gov have all the info you could need

Call me crazy, but I doubt the IRS would want to give us any "friendly" advice on ways to reduce our taxes...

[Aproct]

Tulsa lawn guy,

Okay, let me see if I can explain this the easy way. "Basis" starts out as what you put into the business to get it started, ie cash into a checking account, equipment that you purchased for the company. Now depending on the how you put the equipment in, you may have to make any adjustment for any loans that maybe on the equipment. Now lets say you put into the business $10,000 worth of fcash and equipment. So at 1/1/XX you have a basis in the S-corp of $10,000.

Now let's say you have net income at the end of the year of $1,000. The S-corp will have 1120S prepared and kick out a K-1 to you as the owner showing $1,000 of taxable income (I am not taking into any tax adjustments that your accountant will do on the book/tax adjustments, I am trying to keep this simple). So you have book income of $1,000 and taxable income of $1,000. Starting with your basis, your basis would increase to $11,000 (beginning basis $10,000 plus you book income of $1,000). Okay? Now on you tax return the $1,000 worth of taxable income would flow over to your 1040 as income from a S-corp on line 17. No 15% self employment tax will be imposed on this income.

Now if the same example above was a loss, your basis would decrease by $1,000, ie $10,000-$1,000=$9,000 new adjusted basis. The loss would flow over to your 1040, Line 17 which would benefit your personal taxes. You could continue to take loss year after year, if the business creates them until your basis in the company is gone.

Now as for your other question, let's see if I remember the facts. If you draw a salary from the S-corp, the corporation will pay 1/2 the payroll taxes, and you, the "employee" will have to pay the other half. just like if you were getting paid by someone else. The taxes that the S-corp pays for payroll will be used as a deduction on the 1120S. Now you, as the employee will receive a W-2 from the S-corp and repor t the income on your personal tax return. You will NOT pay the additional 15% self employment tax. Remember, you are getting paid as if you were an employee.

Now if you take a draw of $75,000, that draw will be taxed as a capital gain. Let me explain. Lets go back to the basis issue and that you have $10,000. This is what you have in the company, so you can take up to $10,000 in draw and not be imposed any tax. IRS looks at this as a return of capital. But the remaining $65,000 would be a distribution in excess of your basis. This amount would show up on your Schedule D, Capital Gains/Losses and be taxed at the capital gains rate which may dramatically affect your tax rate depending on what other income you may have received.

Any questions? I hope this helps!

Sodbuster, please let me know if I have missed anything.

[The landscaper]

That really helps me out a lot. I was pretty confused on the s corp. I have a question tho. Can i still run a s corp if i have a partnership? To me the s corp sounds very beneficial because you dont have to pay the 15% self employment tax. Do you still get all the tax write offs as you would when being a sole prop or partnership?

[Aproct]

landscaper,

Actually, no. You will have to dissolve the partnership and create the S-corp. Now you could start filing for the S-corp and once it is registered and so forth, dump the assets from the partnership into the S-corp. There are a lot of issues with this regarding taxes to the partners and so forth. Depending on the size, you do a possible acquition of the partnership by te S-corp. But it truely depends if that route is worth it due to fees incurred and so forth. So the best thing to is just work on getting the S-corp set up and possible sell or transfer the assets from the partnership.

Hey, you could have the partnership own 100% of the S-corp shares......but that's for another class period......

[Brandon]

Very good thread. Im just a rookie but I do know that S-corp is limited to 75 investors unlike the unlimited c-corp. S-corp is not double taxed on profit and dividend like c-corp. In a corp you can write off all your insurance (medical, liability, etc...) as business expense. Also paying secreteries etc... You must have an anual meeting of share holders to elect board members, oficers, and discuss where biz is going, profit, etc... You can have this meeting anywhere in the world and every person share holder etc. can write off every expense incurred at it. Good for free vactions all over the world. In a corp you will make most your money on stock, service is second. Thats why maybe llc is better for most. You have to keep a log of meeting and minutes with corp not with llc. I have many questions to and few answers so I hope that this helps.

[Brandon]

Aproct,
With a new partnership close to tax time. Would it be better to file normally as general partnership, or do a quick llc on you company right before you file? How much profit must you show in order to write off high dollar expenses like trucks and heavy equiptment on a new company. Thanks for any help.

[tulsa lawn guy]

Andy,

Thank you very much for the information… I had it all wrong...

Let me just confirm this once more…

You stated that if I took out $75,000 in the form of distributions, because of my $10,000 basis in my company, I would not be taxed on the first $10,000. That leaves $65,000 in taxable distributions that would be taxed at capital gains rates, and NOT at personal income tax rates? So, for example, in 2003 capital gains tax is 15% I believe, and my personal bracket would be much higher, of course. So is it correct to say that I will be charged only a 15% capital gains tax on the distributions that I withdrew from my company??

Thanks again for pounding this into my stubborn head!

Ryan

[SodBuster]

Aproct, yes that’s correct. However in an employee owned S-Corp a reasonable salary must be taken first subject to normal payroll taxes. The remaining profit if any can then be distributed in whole, not subject to social security and medicare taxes. In situations where the IRS feels that shareholders are taking too little in salary, the IRS will re-characterize all or part of the profits as salary.

LLC Advantages:

Fewer corporate formalities.
No ownership restrictions.
Ability to use the cash method of accounting.
Ability to place membership interests in a living trust.
Ability to deduct losses.
No unemployment tax.