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Thread: S-corp Tax considerations?

  1. #1

    Default S-corp Tax considerations?

    Hello all,

    A graphic designer -- met through a friend -- and I run a creative consultancy S-corp. We share ownership and our consultant responsibilities are in addition to our full time jobs.

    It has been a slow year, and honestly we haven't had the time to devote 40 hours a week to consulting.

    We took in about $14,000.

    Of that:
    -$3,100 went to us. The business acquired hardware and software from us that we each personally brought to the table before formation. These payments are not dividends or earnings.
    -$8,000 went to office supplies (hardware/software), insurance, meals for client meetings, fuel, and other generic, but necessary, expenses.
    -And the rest is being retained for reinvestment and planning.

    I'm using QuickBooks Pro 2009 and I'll be using TurboTax 2009 to file federal and state. Before I file, I'll enlist the services of an accountant and close friend who promised to help us out in our first year.

    I understand I didn't provide the full picture, but I just wanted to ask you guys for things I should be reading and things I should be anticipating (social security, medicare, etc.)

    Based on what I provided, does anything stick out?

    Thank you so much for continuing to answer my questions.

    Regards,
    Sean

  2. #2

    Default

    If you paid yourselves no wages, then the corporation has no obligation to pay medicare or social security taxes. Based on the limited facts you gave, it seems like paying no wages was reasonable, but on different facts the IRS could assert that a portion of your dividends was really a disguised salary, in which case the corporation would be liable for its share of medicare or social security taxes.

  3. #3
    Mr. Tax Man
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    Default

    A lot of businesses are like yours and are a part-time operation. Nothing unusual there.

    The only thing you're going to want to make sure you do is to capitalize your hardware and software. As things such as Adobe Photoshop have a useful life greater than one year, you need to recognize that cost over a period of time. You CAN elect to have a Section 179 deduction (expense it all in the first year). Whether such a thing is the best move depends on your tax situation currently, and what you anticipate having for income next year.

    If you can, I'd have the accountant look over things. If he has experience with S-Corporations, you should also pay him to do the return. There are numerous things that could up, and all it takes is ONE to blow your "S" election. You'll be paying dearly for the services of an accountant at that point.

    One simple mistake: you are doing more work for the business than this other gentleman, but are both 50/50 shareholders. You decide that you'll take more of a dividend/distribution at the end of the year to compensate you, in lieu of the normal salary. POOF! There goes your "S" election. You just created a second class of stock, and only one is allowed with an S-Corp.
    Small Business CPA
    "A tax loophole is something that benefits the other guy. If it benefits you, it's tax reform."

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