Taxes - Business Entity


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Taxes - Business Entity

  1. 1. Accounting & Tax Basics for Start up Business Gary Hessenaur, C.P.C. Hessenaur & Associates, CPA, P.C.
  2. 2. C-Corp vs Pass Through Entity <ul><ul><li>Income from Business </li></ul></ul><ul><ul><ul><li>C-Corp pays their own taxes on income </li></ul></ul></ul><ul><ul><ul><li>Pass Through Entity owners pay the taxes </li></ul></ul></ul><ul><ul><li>Net Losses from Business </li></ul></ul><ul><ul><ul><li>C-Corp applies to prior year income or carries forward to future taxable years </li></ul></ul></ul><ul><ul><ul><li>Pass Through Entity – Owners may offset other taxable income, provided they have bases. </li></ul></ul></ul><ul><ul><ul><li>Pass Through Entity – Risks of losses being suspended </li></ul></ul></ul>Hessenaur & Associates, CPA, P.C.
  3. 3. C-Corp vs Pass Through Entity <ul><li>Responsible Party for Income taxes </li></ul><ul><ul><li>C-Corp the business is responsible for paying the taxes </li></ul></ul><ul><ul><li>Pass Through Entity owners are responsible for paying taxes </li></ul></ul><ul><ul><ul><li>Owner agreements may require business to make distributions to pay income taxes. </li></ul></ul></ul><ul><ul><ul><li>Agreements difficult to enforce if business does not have cash flow </li></ul></ul></ul>Hessenaur & Associates, CPA, P.C.
  4. 4. C-Corp vs Pass Through Entity <ul><li>Need to Retain Profit in Business </li></ul><ul><ul><li>C-Corp generally has more favorable tax rates on first $100,000 of income. </li></ul></ul><ul><ul><li>Some Pass Through Entities may also pay self employment taxes on income </li></ul></ul>Hessenaur & Associates, CPA, P.C.
  5. 5. C-Corp vs Pass Through Entity <ul><li>Are Owners Looking for Dividends or Distributions </li></ul><ul><ul><li>C-Corp double taxation for dividends </li></ul></ul><ul><ul><ul><li>Favorable tax brackets may off set </li></ul></ul></ul><ul><ul><li>Pass Through Entity no additional taxation on dividends or distributions </li></ul></ul><ul><ul><ul><li>May be rules on how distributions are made </li></ul></ul></ul><ul><ul><ul><li>Will change owners basis for later sale of business </li></ul></ul></ul>Hessenaur & Associates, CPA, P.C.
  6. 6. C-Corp vs Pass Through Entity <ul><li>Is There a Sale of Business Planned </li></ul><ul><ul><li>Taxation issues can be complicated. Use professional help. </li></ul></ul><ul><ul><li>Basic Types of Business Sale </li></ul></ul><ul><ul><ul><li>Stock or Sale of Business Entity </li></ul></ul></ul><ul><ul><ul><li>Asset Sale </li></ul></ul></ul><ul><ul><ul><li>Liquidation </li></ul></ul></ul>Hessenaur & Associates, CPA, P.C.
  7. 7. C-Corp vs Pass Through Entity <ul><li>Will Owners Agree to Type of Entity </li></ul><ul><ul><li>Owner operated not much issue on Type of Entity </li></ul></ul><ul><ul><li>Friends and Family investors Pass Through Entity can work well </li></ul></ul><ul><ul><li>Most Angel and VC investors do not want pass through entity </li></ul></ul>Hessenaur & Associates, CPA, P.C.
  8. 8. C-Corp vs Pass Through Entity <ul><li>Year End of Entity </li></ul><ul><ul><li>C-Corp may elect any year end </li></ul></ul><ul><ul><li>Pass Through Entity must be December year end </li></ul></ul>Hessenaur & Associates, CPA, P.C.
  9. 9. C-Corp vs Pass Through Entity <ul><li>Michigan Income Taxes </li></ul><ul><ul><li>Both Entities are subject to Michigan Business tax. Most likely not based on income </li></ul></ul><ul><ul><ul><li>If gross revenue less than 350,000 no tax required </li></ul></ul></ul><ul><ul><li>Pass Through Entity owners will also pay state income taxes (4.3%) </li></ul></ul>Hessenaur & Associates, CPA, P.C.
  10. 10. C-Corp vs Pass Through Entity <ul><li>Owners fringe benefits, primarily health insurance </li></ul><ul><ul><li>C-Corp fully deductible </li></ul></ul><ul><ul><li>Pass Through Entity </li></ul></ul><ul><ul><ul><li>Fully deductible IF business income </li></ul></ul></ul><ul><ul><ul><li>If Loss possible no deduction </li></ul></ul></ul><ul><ul><ul><ul><li>Depends lot on other income and deductions on personal taxes </li></ul></ul></ul></ul>Hessenaur & Associates, CPA, P.C.
  11. 11. S-Corp vs LLC <ul><li>Type of Owner </li></ul><ul><ul><li>S-Corp </li></ul></ul><ul><ul><ul><li>US Citizens or US residence. </li></ul></ul></ul><ul><ul><ul><li>No Corporation, Partnerships, LLC or Trusts (some exceptions for trusts) </li></ul></ul></ul><ul><ul><li>LLC No restrictions </li></ul></ul><ul><li>Class of Stock </li></ul><ul><ul><li>S-Corp – Only one class allowed </li></ul></ul><ul><ul><li>LLC - No restrictions </li></ul></ul>Hessenaur & Associates, CPA, P.C.
  12. 12. S-Corp vs LLC <ul><li>Self Employment tax – Maximum 15.3% </li></ul><ul><ul><li>S-Corp – Only on wages paid (Reasonable salary required) </li></ul></ul><ul><ul><li>LLC </li></ul></ul><ul><ul><ul><li>All profits subject to S.E. tax </li></ul></ul></ul><ul><ul><ul><li>May be limited based on other SE income </li></ul></ul></ul><ul><ul><ul><li>Losses may offset other S.E. taxable income </li></ul></ul></ul>Hessenaur & Associates, CPA, P.C.
  13. 13. S-Corp vs LLC <ul><li>Losses, At Risk Rules </li></ul><ul><ul><li>S-Corp shareholder losses limited to stock basis and direct loans to company </li></ul></ul><ul><ul><li>LLC owners losses limited to equity, direct loans and loans guaranteed </li></ul></ul><ul><ul><li>Both may result in suspended losses if ownership disproportion to basis </li></ul></ul><ul><ul><li>Both allow for loss carryforwards </li></ul></ul>Hessenaur & Associates, CPA, P.C.
  14. 14. S-Corp vs LLC <ul><li>Later Conversion to C-Corp </li></ul><ul><ul><li>S-Corp </li></ul></ul><ul><ul><ul><li>Simple election beginning of tax year or disqualify. </li></ul></ul></ul><ul><ul><ul><li>Can’t change back to S-Corp for 5 years </li></ul></ul></ul><ul><ul><li>LLC </li></ul></ul><ul><ul><ul><li>Need to Dissolve and Incorporate </li></ul></ul></ul><ul><ul><ul><li>Can be costly direct and indirect costs </li></ul></ul></ul><ul><ul><ul><li>Caution to avoid taxable event </li></ul></ul></ul>Hessenaur & Associates, CPA, P.C.