This content is not currently being supported.

Here is a quick recap or summary of S Corps, and why you might consider making the election-

• Must have an LLC, partnership or C Corp in place

• Can save 8% – 10% of net income on taxes, possibly more

• Must run payroll and prepare a corporate tax return, no exceptions

• Payroll ran quarterly, previous distributions can be reclassified as wages (elegance!)

• Pull money out with reimbursements for business expenses (home office, mileage, etc.)

• Hefty retirement contributions allowed, reduces income

• Health insurance premiums and HSA contributions get dollar for dollar deduction

• Pay for your children’s college expenses through the S Corp

• Can retroactively make the S-Corp election back to Jan 1 2017

• Low operational hassles

• Approximately $2,940 modeling and consultation.

Attention! Sales pitch coming- S Corps are easy, they typically make sense if you are above $35,000 in net income after expenses, and they will improve your financial position in life. Contact us to get started. Did that sound too cheesy? Seriously the right questions must be asked and answered since not all S corporations make sense.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

$24.95	$17.95	$12.95

Taxpayer’s Comprehensive Guide to LLCs and S Corps

The post Recap of S-Corps appeared first on WCG CPAs & Advisors.

This content is not currently being supported.

There are audits risks with any business form, and for any taxpayer. Typically taxpayers under $200,000 in income face a 1% audit risk. And S-Corps face a 0.42% audit risk.

The Treasury Inspector General of Tax Administration (TIGTA) recently released figures about S-Corp audits. Over 62% of S-Corp audits resulted in a no-change audit. Good news. However, of those S-Corps with one shareholder and losses in excess of $25,000 for three consecutive years, the IRS had an average adjustment of $92,000 on the shareholder’s individual tax return. Wow! Truth be told, most S-Corp audit concerns stem from net profits being paid out as distributions without corresponding salaries, and the associated Social Security and Medicare taxes.

To reiterate, only 0.42% of S-Corps were audited, and of those examinations, a whopping 62% resulted in no change. That’s incredible odds. Same odds the Bears have of winning a Superbowl. Go Pack!

Back to audits- S-Corps have become super popular because of the low audit risk and more importantly the savings of self-employment taxes. The IRS is catching on however, and is targeting S-Corps where little to no salary is being paid to the shareholders. And this is easy to do. The IRS connects the dots by back-tracking K-1s to your company’s EIN to your company’s list of W-2s to the W-2’s Social Security numbers back to your K-1. The IRS probably has an app for that.

If your K-1 does not have a corresponding W-2, or if your W-2 income is low compared to your K-1 income you are creeping up on the “let’s call this guy” list. In other words, your audit risk is increasing.

As tax professionals we get concerned about S-Corps not paying themselves a reasonable wage for obvious reasons. And while it might appear that any salary will allow you to fly below the IRS radar, we strongly advise against it. The more abuse occurring in S-Corps is only going to attract the attention of Congress, and this quasi-loophole might close.

Read our tax article on audits, the types of audits and what to do with an audit at-

wcginc.com/audits

It’s riveting.

And No, we do not and cannot play Audit Lottery. As professional tax preparers and accountants, WCG (formerly Watson CPA Group) is bound by things such as standards, ethics and law. Just because audit rates might be low, we cannot take an unreasonable position or allow a client to file a fraudulent tax return.

We hate when the law gets in the way of a creative tax return!

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

$24.95	$17.95	$12.95

Taxpayer’s Comprehensive Guide to LLCs and S Corps

The post Audit Rates and Risks with an S-Corp appeared first on WCG CPAs & Advisors.

This content is not currently being supported.

Can a 1099-MISC avoid self-employment taxes? Maybe. IRS Revenue Ruling 58-112 defines a trade or business activity as one that is regular, frequent and continuous. Revenue Rulings (58-112, 55-43 and 55-258) indicate that income from an occasional act or transaction, absent of proof of efforts to continue those acts or transactions on a regular basis, is not income from a trade or business.

Some taxpayers who were able to able to claim their income as ‘other income’ and avoid self-employment taxes had to demonstrate that the activity was a one-and-done event (giving a speech for example) or was sporadically done. In other words, the taxpayer cannot hold himself or herself out to the public to engage in the activity.

If you meet these criteria, your 1099 income is exempt from self-employment taxes. If you attempt to file your tax returns with a 1099 and claim that it is not subjected to self-employment taxes, you have a good chance of getting a letter from the IRS. And No, they are not writing to say they agree. If you believe you are correct and need help fighting this, please let us know.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

$24.95	$17.95	$12.95

Taxpayer’s Comprehensive Guide to LLCs and S Corps

The post 1099 Income as Other Income, No Self-Employment (SE) Taxes appeared first on WCG CPAs & Advisors.

This content is not currently being supported.

As mentioned earlier, K-1 income from an S-Corp will be reported on Schedule E of your personal tax return since it is business investment income. If you do not materially participate in the S-Corp’s operations, this can be a huge windfall if you are a rental property owner too. How does this play into S-Corps? Here we go-

Let’s presume that you have a rental loss of $50,000. Rental income is typically considered passive, meaning that you are not directly earning the income as you would with a job. Passive losses may be deducted from non-passive income such as wages, but there are limits. Passive loss limits for married taxpayers max out at $25,000, and that number decreases as your gross income increases.

Specifically, passive loss reduces $1 for every $2 over $100,000 adjusted gross income and by $150,000 (for married filing joint taxpayers) the passive loss deduction is $0. Bummer. Not all is lost however.

Let’s also presume that you are a minority investor in an S-Corp that earned $50,000 and reported the income on a K-1. Let’s say you do NOT materially participate in the running of the S-Corp. Without the rental, you would be taxed on $50,000. Without the S-Corp you would only be able to deduct $25,000 worth of passive losses. But with both the rental and the S-Corp, you shelter $50,000 of your K-1 with your rental losses, and pay $0 tax. Cool, huh?

Granted, this is rare- most S-Corp shareholders actively participate and cannot offset their S-Corp income with rental losses. Although there might be some wiggle room with spouse A owning 90% of an S-Corp, for example, that he or she doesn’t materially participate in. The same spouse A could then own 100% of the rental properties. This can get convoluted for sure, and careful tax planning must be exercised.

As a side note, it is NOT a good idea to make an S-Corp election on your LLC if it owns rental property. Rental property by definition is passive income (unless you are a real estate professional as defined by the IRS) and therefore not subject to self-employment tax. But if you run your rentals through an S-Corp, you will be required to perform payroll and you’ll be paying Social Security and Medicare taxes which are the same as self-employment tax. Don’t do it. You’ll artificially increase your tax liability by essentially converting passive / unearned income into earned income.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

$24.95	$17.95	$12.95

Taxpayer’s Comprehensive Guide to LLCs and S Corps

The post Rental Losses with an S-Corp appeared first on WCG CPAs & Advisors.

This content is not currently being supported.

Should you put a rental in an LLC? Sure. Why not? Everyone else does. The real answer is Perhaps.  There are several myths out there regarding the use of an LLC as a shelter from potential lawsuits and litigation, but most concerns stem from tortious liability.

So, what do you do? Securing a decent umbrella policy both at the personal and commercial level is WCG (formerly Watson CPA Group)’s strong recommendation for liability arising from your acts, errors, and omissions. General umbrella policies are $300-$500 per year. The liability floor of many umbrellas is around $500,000 so you might have to raise the liability limits of each rental to meet the floor (so there’s no break in coverage).

It appears that many credible lawsuits will sue to the limit of coverage to avoid lengthy and expensive trial litigation. Again, please consult your attorney for your unique situation. And no, we don’t sell insurance.

Specifically for landlords, keep your rental in proper working order- tight railings shoveled sidewalks and driveways, cooler hot water temperature settings, newer tempered windows, update smoke detectors, CO2 monitors, etc.

If you think you’re clever and quit-claim the title/deed to the LLC after you close on the loan be careful. The lender might catch wind of it through routine title checks that they now perform, and the lender might call the loan. Not good.

Having said all that, it is not a bad idea to have an LLC own your rental property if you can. If you can avoid having to personally sign for the mortgage note through a non-recourse loan, that would be helpful too (lenders usually want a maximum of 60% loan to value). You might also consider having your tenants sign Hold Harmless Agreements. Essentially you are adding layers to your liability onion.

Additionally, if you are investing with partners an LLC with a solid operating agreement might be the only way to properly handle the ownership. A common situation is where two unrelated people invest together and need ways to affect ownership changes. Of course, WCG (formerly Watson CPA Group) can assist you in creating the LLC.

On small side note- real estate professionals might also be creating a mess with the material participation definitions within a partnership LLC. If you are considering to claim the real estate professional designation, we encourage you to read our recent tax article on the subject-

wcginc.com/realestatepro

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

$24.95	$17.95	$12.95

Taxpayer’s Comprehensive Guide to LLCs and S Corps

The post Rentals Owned by an LLC Fallacy appeared first on WCG CPAs & Advisors.

This content is not currently being supported.

Many people are finding themselves in a quandary between being a W-2 employee of a company or working for that same company in a contractor relationship. As a quick aside, the IRS and more importantly local state governments are going after companies who employ people as contractors. In Colorado, an independent contractor must hold himself or herself out to the public as a trade or profession before he or she can be deemed a contractor and NOT an employee.

Most contractor relationships would blow up if scrutinized. But the penalties and interest and fines and mess usually fall on the company and not the contractor/employee.

Check with your local jurisdiction to see how this is defined. You can also do a quick search for contractor versus employee and get hundreds of hits. Our KnowledgeBase Articles will also help at-

wcginc.com/kb/20/

Back to your quandary. Typically it is better to be a contractor than an employee. Your taxes are lower, you have more tax wiggle room so-to-speak, and you usually make more money. Why? When a company employs a person the company has all kinds of extra costs such as benefits, unemployment, workers’ compensation, disability, health care potentially, etc. To give you a $1, some companies have to spend $1.40.

To give you this same $1 as a contractor costs them just that, $1.

If you are considering two offers, one as an employee and another as a contractor, contact WCG (formerly Watson CPA Group). We can model these scenarios for you and determine that the best choice is, and help you in the negotiation process.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

$24.95	$17.95	$12.95

Taxpayer’s Comprehensive Guide to LLCs and S Corps

The post W-2 or 1099-MISC That Is The Question appeared first on WCG CPAs & Advisors.