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