S Corporation Presentation

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There are many people creating new entities in order to protect their assets and liability. This small presentation of running an S-Corporation has been provided to offer some "Basic" …

There are many people creating new entities in order to protect their assets and liability. This small presentation of running an S-Corporation has been provided to offer some "Basic" understanding of certain requirements that are often overlooked when choosing the S-Corporation entity type.

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  • 1. S Corporation Important information when running an S-Corporation 05/10/10
  • 2.
    • Filing requirements:
      • Every S-Corporation must file, regardless of the amount of income or loss.
      • SCorp filing deadline is the 15 th day of the third month following the close of the tax year.
      • A six month extension may be obtained by filing form 7004.
      • Estimated tax payments are paid at the individual level.
    05/10/10
  • 3.
    • Requirements
      • Limited to 100 shareholders
      • Only one class of stock
      • Must be a domestic corporation.
      • Shareholders must be US citizen or residents
        • Resident aliens qualify if they meet the substantial presence test as outlined in Section 7701(b)
    05/10/10
  • 4.
    • Reasonable wages
      • An incentive exists for an S corporation to pay little or no wages to shareholder employees. This is because wages are subject to employment taxes (FICA and FUTA), while ordinary income passing through to S corporation shareholders is not subject to employment taxes, either at the corporate or the individual level
      • However, the issue of reasonable wages frequently ends up in court, and several decisions have held for the IRS. When the IRS is successful in recharacterizing distributions as wages, the S corporation and employee are subject to employment taxes, as well as penalties and interest for underpayment and failing to file employment tax returns.
    05/10/10
  • 5.
    • Establishing that Compensation is Reasonable – Tax Court decision to consider:
      • The character and financial condition of the corporation
      • The role the shareholder-employee plays in the corporation, including position, hours worked and duties
      • The corporation’s compensation policy for all employees and the shareholder’s salary history, including the internal consistency in establishing the shareholder’s salary
      • How the compensation compares with similarly situated employees of other companies and
      • Whether a hypothetical, independent investor would conclude that there is an adequate return on investment after considering the shareholder’s compensation
    05/10/10
  • 6.
    • The courts have also considered additional factors in deciding whether compensation is reasonable
      • The employee’s qualifications;
      • The size and complexity of the business;
      • A comparison of salaries paid to sales and net income;
      • General economic conditions;
      • Salaries versus distributions and retained earnings;
      • The corporation’s dividend history;
      • Whether employee and employer dealt at arm’s length and
      • Whether the employee guaranteed the employer’s debt.
        • No single factor controls, but rather a combination of the factors must be considered. Furthermore, these factors are not all-inclusive and may not be given equal weight.
    05/10/10
  • 7.
    • Items to be included in wages for a more than 2% shareholder:
      • Health insurance premiums paid for more than 2% shareholders of an S corporation are taxable as wages and reported on the shareholders’ Forms W2, but not subject to FICA.
        • The employee-shareholder may deduct the cost of the health insurance premiums paid on their behalf as an adjustment to income on their individual forms 1040.
      • Up to $50,000 of group term-life insurance on an employee’s life
      • Meals and lodging furnished for employer’s convenience
      • Disability insurance premiums
      • Automobile usage – the value of the nonbusiness use of vehicle
    05/10/10
  • 8.
    • New for 2009 & 2010
      • Section 179 deduction
          • $250,000 (2009) $134,000 (2010)
      • CA Section 179 deduction
          • $25,000 (2009) $25,000 (2010)
      • Mileage deduction
          • $0.55 (2009) $0.50 (2010)
      • HSA contribution limits
          • $5,950 Family (2009) $3,330 Self only (2009)
          • $6,150 Family (2010) $3,050 Self only (2010)
      • Business gifts remain at $25
      • SEP-IRA maximum contribution for 2009 & 2010 $49,000
    05/10/10
  • 9.
    • Shareholder basis
      • Increases to basis:
        • Additional stock purchases and capital contributions
        • Separately stated income, including tax-exempt income
        • Nonseparately stated income
        • Depletion in excess of the basis in property
      • Decreases to basis:
        • Distributions of cash or property to shareholders
        • Separately stated losses and deductions
        • Nonseparately stated losses
        • Nondeductible corporation expenses
        • Depletion to extent it does not exceed basis in the property
    05/10/10
  • 10.
    • Operating a Corporation
    • The most important thing to know about operating a corporation is to leave a paper trail of the important business activities. Below are some of the most common issues to consider when maintaining your corporation.
    • Keep things separate As previously mentioned, it's important to keep the business and affairs of the corporation separate from the personal affairs of the stockholders, directors and officers. This means setting up a separate bank account, maintaining separate records, and keeping separate books for accounting purposes.
    • Meetings Directors need to hold periodic meetings, and shareholders must meet once per year to elect directors. Meetings can take place in person or by telephone. Either way, you need to make a written record of the items discussed and actions approved at the meetings. Alternatively, you can just get all the directors (or a majority of the stockholders) to sign a statement approving corporate actions. This is known as "written consent."
    • Transfer of ownership interests Generally, as long as all applicable laws are followed, a stockholder is free to sell or transfer shares to anyone. However, with small corporations in which the stockholders act more like partners and each is integral to the success of the company, you may wish to consider placing restrictions on the transfer of shares. Stockholders sometimes enter into a buy-sell agreement which sets the terms for when shares can be transferred or sold. A typical buy-sell agreement would state that if one stockholder seeks to sell shares to any third party, the other stockholders have a right of first refusal; that is, the other stockholders may purchase those shares at the same price. Only if the other stockholders do not purchase those shares can a stockholder sell to a third party. Additionally, certain professional corporations can only have shareholders that are licensed professionals, limiting the transferability of shares.
    05/10/10
  • 11. 05/10/10 Ownership types: This diagram works only one way - down S-Corp C-Corp LLC Partnership S-Corp C-Corp LLC Partnership