| Ever wondered why so many small
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| | third form of tax savings because S
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| businesses-more than 3,000,000 at last
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| | corporations don't pay corporate income
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| count-operate as an S corporation?
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| | taxes. This means that S corporations
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| Simple. An S corporation saves business
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| | avoid the often-talked about
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| owners big taxes in three separate
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| | "double-taxation" problem. However, the
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| ways:First, as compared to regular
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| | "no corporate income taxes" benefit often
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| corporations (sometimes called C
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| | isn't a savings for small corporations
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| corporations), S corporation owners can
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| | and their owners.But let me explain.
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| use the business's losses incurred during
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| | Suppose that two corporations each earn
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| the early lean years on the owner's
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| | the same pretax profit of $100,000 and
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| personal returns as deductions. For
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| | are owned by Ms. DaVinci who pays the
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| example, suppose a new S corporation
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| | highest federal income tax rate of 35%.
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| suffers a $20,000 loss its first year and
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| | One corporation is an S corporation and
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| that the corporation is equally owned by
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| | the other is a C corporation. The S
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| two shareholder-employees, Smith and
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| | corporation can distribute the entire
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| Jones. Smith and Jones each get a $10,000
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| | $100,000 in profits to DaVinci as
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| business deduction on their individual
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| | dividends because there is no corporate
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| tax returns because of the S corporation
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| | income tax. DaVinci then pays $35,000 in
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| loss. This $10,000 deduction might save
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| | personal income taxes on the S
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| them each as much as $4,000 in federal
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| | corporation profits, which means she nets
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| and state income taxes.A second, big S
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| | $65,000 in after-tax profits from the S
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| corporation benefit: As compared to
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| | corporation. In comparison, the C
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| almost every other business form, S
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| | corporation can't pay the entire $100,000
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| corporations can save their owners
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| | in profits to DaVinci. The C corporation
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| self-employment or Social Security
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| | first pays $22,250 in corporate income
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| Medicare taxes. Suppose, for example,
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| | taxes. When the C corporation pays the
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| that Adams, Brown and Cole independently
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| | remaining $77,750 to DaVinci as a
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| each own businesses that make $90,000 a
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| | dividend, DaVinci pays another $11,663 in
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| year in profits. Each business owner may
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| | 15% "dividend" taxes on the C corporation
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| pay $13,000 in income taxes. But,
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| | profits. This means that DaVinci nets
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| unfortunately, that's not the only tax
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| | roughly $66,000 in after-tax profits from
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| they pay. Each owner also pays
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| | the C corporation profits. In this case,
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| self-employment or Social Security
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| | DaVinci saves money with a C corporation
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| Medicare taxes.For example, Adams
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| | in spite of having to pay the corporate
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| operates his business as an LLC and
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| | income tax.How to Get S Corporation
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| therefore pays 15.3%, or roughly $13,500,
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| | BenefitsTo create an S corporation and
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| in self-employment taxes on his
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| | receive S corporation tax savings, you
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| profits.Brown operates his business as a
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| | need to do two things: First, you must
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| C corporation which pays all of its
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| | incorporate the business either as a
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| profits to him as a salary. Accordingly,
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| | regular corporation or as a limited
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| Brown (through his corporation) also pays
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| | liability company. Second, you need to
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| 15.3%, or roughly $13,500, in Social
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| | make an election with the IRS to have the
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| Security and Medicare taxes.Cole's
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| | corporation or LLC treated as an S
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| situation is different. Cole operates his
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| | corporation. The S election is made with
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| business as an S corporation which means
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| | form 2553, available from the web site.
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| that Cole can split his $90,000 of
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| | Note that some states (such as New York)
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| profits into two payment amounts: salary
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| | require a separate state S election.A
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| and S corporation distributions. Suppose
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| | final tip: S corporations can save you
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| that Cole says only $40,000 of his
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| | thousands of dollars annually, but your
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| profits are salary and takes the other
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| | tax savings can't start until you elect S
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| $50,000 as a "dividend" distrbution. In
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| | corporation status. If you're interested
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| this case, Carter pays the 15.3% Social
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| | is electing S status to save on taxes for
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| Security/Medicare tax only on the $40,000
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| | next year, you may want to call your tax
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| in salary. Carter therefore pays roughly
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| | advisor or attorney right now!Redmond WA
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| $6,000 in Social Security/Medicare
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| | CPA Stephen L. Nelson is the author of
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| taxes-and annually saves $7,000 in taxes
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| | QuickBooks for Dummies and more than 100
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| as compared to Adams or Brown.S
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| | other books as well.
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| corporations also, sometimes, provide a
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