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theplayer11
01-24-2010, 05:22 PM
HI, New to the forum. My wife and I own a nursery, file form1065 as a partnership. I can't believe I was paying so much in SE taxes unnecessarily. Please let me know If I have this right. I will file for LLC in my state, 2 members. I then file form 2553 with the IRS to elect to file taxes as a s -corp. correct?

Questions: 1) Say our net profit is $120k(60K each on k-1s)..we would pay $18k(15%) in self employment taxes filing as a partnership. Filing as a s-corp and giving each of us a $30k salary, we would only be paying $9k is SE tax..correct? If so, boy do I feel foolish not doing this years ago.

2) Do we have to set up a payroll system with w2s?..We currently don't need to do anything. Could salary be made once a year? What exactly needs to be done?

3) Where are the remaining "distributions" entered? on form 1040....where? ScheduleE? non passive? With above example, the other $60K could all be given to us as distributions?

4) We currently do not have to pay quarterly estimated taxes because it's considered farm income and we file and pay by March 1. Would that change with filing as s-corp?

5) Our partnership currently has an employer identification number. Would I need to apply for a new # once LLC is established?

Thanks..

Evan
01-24-2010, 09:31 PM
You really should speak to a Certified Public Accountant in your area to discuss this, and to make sure you are handling this properly. There are other possibilities which could reduce your taxes, and there could be adverse tax consequences by seeking to be taxed as a corporation (S or C). There are some discussions on this here, which you can find by searching. Form 8832 should be filed first to change how your entity is taxed before you elect to be taxed as an S-Corp.

1. You are correct, that all $120,000 is subject to self-employment taxes of 15.3%, plus income taxes, equating to about $17,000 in actual SE taxes, and another $30,000 in income taxes, plus any state taxes you are subjected to. If a reasonable salary for someone (e.g. you'd pay someone else the same amount of money for the work you perform), then you could realize some savings in employment taxes.

2. Yes, you would need to do payroll. This means registering with the state as an employer, filing the appropriate quarterly reports with the federal and state government, and remitting taxes accordingly. I highly suggest outsourcing. Salaries can be made at any frequency.

3. If an S-Corp, you'd still receive a K-1, so it appears on Schedule E like your current K-1's do. No significant change there, except these amounts don't flow through to Schedule SE. If you're both working in the business, presumably this is non-passive. Then again, if one of you were working in the current business, you'd also have some passive income and could save money.

4. If you plan on owing $1,000 or more in the current year, estimated taxes must be paid. I have extremely limited knowledge of farming activities, and presumably a CPA in your area (assuming farming is common in that area) would have more insight in that area.

5. No, you're still an LLC.

Other considerations before reclassifying -- how your state taxes S-Corps, and the cost of a payroll service (or of learning how to do payroll).

theplayer11
01-24-2010, 10:10 PM
thanks for the reply..One follow up to question 5. We are currently NOT a LLC, we are a partnership.. wouldn't we need to get a new EIN once LLC is established? From your answer, I'm assuming you thought we were currently a LLC and wanted to change to s-corp for tax purposes.

Evan
01-24-2010, 11:36 PM
In my opinion, yes... you are creating a new entity (LLC).

theplayer11
01-25-2010, 11:56 AM
Evan one more follow up if you would..regarding question #3 In what box of the k-1 would I enter the distributions(after we take our salaries)? I see 5a and 5b for ordinary and qualified dividends...would it be one of those? I don't see a box marked as "distributions"

Edit..I assume taking a "distribution" is as simple as writing a check from the LLC bank to a personal account?..and can be done at any time?


thanks so much for your help

Evan
01-25-2010, 12:42 PM
Distributions are reported on Schedule M-2, line 7.

That amount will show up on the 1120S K-1, on 16, mark with the letter "D".

Be careful about how you classify this distribution. You follow ALL the rules of S-Corps if you elect that status. So if your wife is 50% owner, she gets a 50% distribution, and you get 50% (or whatever your ownership % are). If you write the check entirely out to yourself, you could risk blowing your S election and being taxed as a C corp. Why? You're creating a second class of stock, which violates the rules of an S-Corp.

theplayer11
01-30-2010, 01:01 PM
Evan...you've been great..one more thing If you don't mind. I've been filing my partnership 1065 myself for the last 15 years and will continue to do so with my new LLC filing as s-corp. One thing I need clarity on is the Schedule M-2. Our gross receipts are under $250k so schedule M-1 and L do not have to be filed, but M-2 does..correct?

Now, how to fill out M-2. Example:..new business bank account just opened and I will fund with $10k. Say net profit after salaries(husband-wife, 50% each) is $50k. Can you walk me through what is entered in columns A and B. I assume "balance at beginning of year" would be zero? Line 2 "ordinary income" would be $50k. Would the $10k be entered in line 3 "other additions"..if so, in column A? Line 7 "distributions" would be amount taken out from company, entered in Column A or B? Lastly ending balance entered in A or B?

Distributions are entered on schedule K line 16d then to the K-1s line 16. Only the amount in line 1 of k-1 "ordinary business income" flows to schedule E. I guess my question here is, what is the purpose for showing the distribution on k-1 line 16d? That person doesn't use that number for anything..do they? ...because only the income figure from line 1 is used to figure income tax.

thanks again

theplayer11
01-30-2010, 05:29 PM
Is this true?. RI LLCs filing as S corp must file RI 1120c instead of 1120s? How does that make sense? Isn't that a 9% tax Evan? That can't be right. I was figuring $500 max for the state business(franchise tax). Would it be more on net profit of $60k after salaries?

LIMITED LIABILITY COMPANY FILERS:
(i) If the LLC is to be treated as a corporation for federal tax purposes, it
shall pay a tax the same as a “C” corporation and file form RI-1120C.
(ii) If the LLC is to be treated as a partnership for federal tax purposes, it
shall pay a fee equal to the minimum tax as defined under §44-11-2(e) and
file form RI-1120S.

Evan
01-31-2010, 12:59 PM
I've been filing my partnership 1065 myself for the last 15 years and will continue to do so with my new LLC filing as s-corp. One thing I need clarity on is the Schedule M-2. Our gross receipts are under $250k so schedule M-1 and L do not have to be filed, but M-2 does..correct?

An LLC taxed as an S-Corp files Federal 1120S, not 1065. But yes, M-2 does need to be filled in, even if you don't do Schedule L and M-1. I usually always prepare Schedule L and M-1 anyways, as everything SHOULD tie in from your normal records. There are some differences, usually. The only exception to that is when NOTHING agrees because the previous accountant had no idea what they were doing. Assuming that that exception applied, I would generally choose NOT to file those schedules in that one year.


Now, how to fill out M-2. Example:..new business bank account just opened and I will fund with $10k. Say net profit after salaries(husband-wife, 50% each) is $50k. Can you walk me through what is entered in columns A and B. I assume "balance at beginning of year" would be zero? Line 2 "ordinary income" would be $50k. Would the $10k be entered in line 3 "other additions"..if so, in column A? Line 7 "distributions" would be amount taken out from company, entered in Column A or B? Lastly ending balance entered in A or B?

Distributions are entered on schedule K line 16d then to the K-1s line 16. Only the amount in line 1 of k-1 "ordinary business income" flows to schedule E. I guess my question here is, what is the purpose for showing the distribution on k-1 line 16d? That person doesn't use that number for anything..do they? ...because only the income figure from line 1 is used to figure income tax.

Schedule M-2 is really just a special tax-purpose "Retained Earnings" account. Generally, you're going to put things under column A, and not B or C, which have other purposes. Net income goes on line 2, and you have tax adjustments that increase/decrease retained earnings for tax purposes.

Again, I would never advise a business owner to prepare their own income tax return for their business in their first year of operations. There are just so many mistakes that can be made, it's not worth the $500 savings to get it prepared correctly by a professional. If you can understand what they did, you could TRY it yourself, but any mistakes made by you are YOUR responsibility if audited.


Is this true?. RI LLCs filing as S corp must file RI 1120c instead of 1120s?

RI corporate income tax rate is 9%, minimum $500 though. The RI-1120C and RI-1120S isn't substantially different, but if a LLC taxed as an S-Corp, the RI-1120S would be filed instead.

If the LLC was taxed as a PARTNERSHIP or if it were DISREGARDED for income tax purposes (aka a SINGLE member LLC) where the income normally flows through via Schedule C, then you need to prepare a RI-1120S as well for the $500.

theplayer11
01-31-2010, 04:00 PM
Evan...are you taking on new clients? I got a quote for well above $500 just for the 1120s fed and state...$2,000....with filing the1040 myself. Our business is fairly simple.


but if a LLC taxed as an S-Corp, the RI-1120S would be filed instead

Makes sense, but below is from the 1120s instructions. Isn't it saying an s corp treated as a corp. for fed taxes files 1120C?


LIMITED LIABILITY COMPANY FILERS:
(i) If the LLC is to be treated as a corporation for federal tax purposes, it
shall pay a tax the same as a “C” corporation and file form RI-1120C.
(ii) If the LLC is to be treated as a partnership for federal tax purposes, it
shall pay a fee equal to the minimum tax as defined under §44-11-2(e) and
file form RI-1120S.

Evan
02-01-2010, 11:29 AM
I am accepting new clients and will contact you privately. What I will say regarding fees is that prices vary widely depending on who you contact and their expertise and years of experience. Some firms cater towards different types of clients, and having different pricing structures.

If you go to a Block, Hewitt, or Liberty type service, they charge per form and per line, and will try print out a lot of unnecessary forms to increase the price. Others may charge by the hour, or some blend both methods.

Sadly, some also charge based on what they think you can afford. I find that to be very unethical, and think that my fees shouldn't slide based on your "income" level. But I can tell you some who would do that!

Evan
02-01-2010, 11:35 AM
Makes sense, but below is from the 1120s instructions. Isn't it saying an s corp treated as a corp. for fed taxes files 1120C?

No, if an LLC is treated as a "C" corporation, you'll file the RI-1120C and federal 1120C. If you properly elect to be taxed as an S-Corp, you'll file federal 1120S and RI-1120S.

The wording is a bit confused, and the instructions further down do provide that if it is an S-Corp, you file the S-Corp return.

jessicalange
02-27-2010, 06:58 AM
I guess my question here is, what is the purpose for showing the distribution on k-1 line 16d? That person doesn't use that number for anything..do they? ...because only the income figure from line 1 is used to figure income tax.

Evan
02-27-2010, 10:33 AM
It affects their basis as a shareholder, and needs to be reported. Further, the IRS may look for an inconsistencies with distributions. Say there are two shareholders (and assume 50/50), and one had a $10,000 distribution, and another had $9,500... The IRS would say you aren't an S-Corp because you now have a second class of stock which gave shareholder #1 that extra $500. Now you're considered a C-Corp from the date of the election.

Let's assume you're a 100% shareholder, and you put $10,000 in the business. In year one, you earn a profit of $60,000 and you distribute $30,000. You're paying income taxes on the entire $60,000, but your basis isn't $10,000 + $60,000. You must also subtract the distribution. You have $10,000 + $60,000 - $30,000 = $40,000 of basis. That means next year if you had a loss of $60,000, you are limited to only $40,000.

It's critical to keep track of your basis each year with an S-Corp, as it will have a big impact if you try to sell the business, or inevitably, when you dissolve. In the above example, that $40,000 would be your basis in the capital gains transaction.