attention All You S Corporation Owners

Asset - attention All You S Corporation Owners

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Our friends at the Internal earnings aid have found that out of all corporate earnings tax returns filed in the United State, 57% are filed as Subchapter S corporations. Because of this statistic, a compliance check of these entities is underway with a choice to be made nationwide of 5,000 returns. From this sampling, Irs will resolve the level of compliance with issues governing S corporations and will expand audits based on its findings. The time has come to make sure your entity is in compliance.

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Asset

What is a Subchapter S corporation? The basic explanation of this entity is to characterize it as a corporation formed to limit exposure of its owner or owners to liability. Unlike the quarterly corporation, The S corporation is typically not a taxable entity in and of it self with its earnings flowing through to its shareholder or shareholders. The attractiveness of this flow through is that it is not field to self-employment taxes which has become one of the major attractions of electing S corporation status. The typical S corporation will usually prevent a fee of unreasonable recompense being raised by the Irs which can generate a exact hardship for quarterly corporations (C corporations). S corporations can not pay fringe benefits to its more than 2% owners of the stock of the entity and have them be deducted at the entity level. Now that we have the basic ground work for the characteristics of the S corporation, let's discuss what the Irs might be trying to find.

First of all, my concept is that the flow through of S corporation earnings will be a major focus. Though S corporation shareholders enjoy flow through earnings not being field to the self-employment tax, I think this enjoyment gets a bit out of hand when profits are all taken as S distributions. My friends, there must be W-2 recompense to the shareholder group as atleat one is performing a aid to the corporation. If the business is just beginning, there is an discussion to say that year one will not furnish any recompense to the shareholder group as what ever is earned will be needed to fund operations. In this event, there should be minimal S distributions to the shareholders and best still, there could be a small salary paid to the man operating the entity. These considerations should be spelled out in the corporate minutes. As time goes on and the earnings history is improved, it makes sense to growth shareholder recompense to atleast the maximum salary limit for collective security. If there is a retirment plan in the S corporation, salary can be set to take benefit of seclusion contributions (S earnings do not count as earned earnings for purposes of taking seclusion benefits). If there is a group of shareholders not participating in the S corporation's day to day operations, they will not need to receive W-2 compensation. However, there connection to the entity should be explained in the minutes of the corporation or in a contract.

The other issue to be particular of is the fringe benefit area. I wonder if the Irs's quest will find that more than 2% shareholders of S corporations are taking deductible fringes at the corporate level in vilolation of tax law? condition insurance wouldn't be my worry as S shareholders are now permitted to take 100% of condition insurance premiums paid by the corporation. I am more concerned about long-term care premiums, child care benefits, medical reimbursements, and the like. These items must be included in the W-2's of the shareholders receiving benefits as opposed to the non shareholder employees receiving the same benefits.

The last major item that I believe will be an issue is in the area of built-in gains. What is this built-in gains issue? If the entity was operating a a C corporation previously and wished to make a subchapter S election going forward, the assets of the C corporation must be valued as of the first day the S election becomes in effect. This is telling the Irs the fair shop value of assets and liabilites as of the S election date to begin the 10 year clock on built -in gain recognition. If the S corporation sells its built-in gain assets during this ten-year time period, it will be forced to pay corporate level earnings tax at the top corporate earnings tax rate. How many of these situations have been executed properly? Were the assets properly valued? Was the right allocation made to the asset classes of the corporation? Is the shareholder group aware of the ten-year time frame? In many instances, I have found that the assets were not properly valued is at all and the shoreholder groups seemed surprised by the ten-year time period. If your C corporation is planning to make this entity switch, please make sure that the assets are valued by a capable business valuation master and that a capbale Cpa works along side this person. Doing this right is a major issue in many instances engaging serious earnings tax dollars.

In closing, the Internal earnings aid is finding determined into the filings of S corporations and it may time for your entity to get a check up.

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