S Corporation Question
Michael Hongslo
While I understand the difference between a C corporation and a S
corporation. With a S corporation the profits or losses spill over into
the principals personal taxes as dividend income. My question is at the
end of the year, all profits or losses is to be distributed to the
shareholders. How does a S corporation able to keep its money for cash
flow and expansion? Or is there a way for shareholders to put the money
back into the corporation without having the corporation considering it a
liability, ie loan?
Thanks,
Mike
Steve Horton
Michael Hongslo wrote:
> While I understand the difference between a C corporation and a S
> corporation. With a S corporation the profits or losses spill over into > the principals personal taxes as dividend income.
No, not necessarily dividend income to the shareholder. !
> My question is at the end of the year, all profits or losses is to be > distributed to the shareholders.
No! they are not necessarily distibuted,
How does a S corporation able to keep its money for cash
> flow and expansion? Or is there a way for shareholders to put the money
> back into the corporation without having the corporation considering it a
> liability, ie loan?
yes, the net profit of an S corp is taxed at the individual level,
generally on line 17 (1040), however, you are asking about loans and
distributions which are separate accounting concepts! If you own an
S-corp or expect to receive some kind of distribution from an S-corp,
you should talk with a local accountant. There are tax and accounting
issues difficult to fully discuss in this forum!
Peter Martin
Michael:
I am not a tax professional, but my understanding is that S-corp profits
and losses are passed through to shareholders for tax *reporting*
purposes (via K1 reports). This doesn't mean that profits have to be
*paid out* to shareholders. What is often done is for the company to pay
out dividends to cover shareholders' tax liabilities arising from the
reported profits, but you could pay out more or less than this, or
nothing at all. Just make sure to pay out the same dividend amount *per
share*, otherwise you may be deemed to have created multiple classes of
stock, which will automatically revoke your S-corp status. Paid-out
dividends are tax-free to recipients (to the extent that they already
have paid -- or will pay -- taxes on reported profits).
Thus, you have a lot of flexibility on how much cash is paid out, and
resorting to loans is not normally necessary.
Michael Hongslo wrote:
>
> While I understand the difference between a C corporation and a S
> corporation. With a S corporation the profits or losses spill over into
> the principals personal taxes as dividend income. My question is at the
> end of the year, all profits or losses is to be distributed to the
> shareholders. How does a S corporation able to keep its money for cash
> flow and expansion? Or is there a way for shareholders to put the money
> back into the corporation without having the corporation considering it a
> liability, ie loan?
>
> Thanks,
> Mike
Karl Irvin
Michael Hongslo wrote:
>
> While I understand the difference between a C corporation and a S
> corporation. With a S corporation the profits or losses spill over into
> the principals personal taxes as dividend income. My question is at the
> end of the year, all profits or losses is to be distributed to the
> shareholders. How does a S corporation able to keep its money for cash
> flow and expansion? Or is there a way for shareholders to put the money
> back into the corporation without having the corporation considering it a
> liability, ie loan?
>
Mike.
The income of the S corp is allocated to the shareholders. It isn't
distributed in the form of cash as a dividend. S corp earnings are
reported on schedule E instead of schedule B.
--
Karl E. Irvin, CPA - Arlington, Texas
David Abrams
Mike,
You just leave the money in the corporation. You do not have to pay it
all to the shareholders. Of course the shareholders still have to pay
taxes on the money whether they get it or not. For example, say I am the
only shareholder of a S corp that shows $1,000,000 in profit at the end of
the year but chooses to keep all that cash for working capital. I better
have a spare $400,000 around to pay my taxes. In reality the company can
distibute $400,000 to me which I have all withheld as fed withholding tax
and keep the remaining $600,000 for working capital. In addition since I
have paid tax on $1M my basis in the company increases by the amount I
paid taxes on. If I then sell the company for $1M I own no tax (but I
paid tax on ordinary income rather than capital gain). The advantage over
a C corp is that a C corp would pay tax on the profit then I would pay tax
again on the distribution as a dividend. If a company plans to never pay
a dividend then a C corp may be a better choice (esp since the nice
politicians raised the personal rate much higher than the corporate rate
for smaller sized companies.)
S exists to deal with the problem which arises when the C corp pays a
salary to the primary shareholder that the US/IRS decides is excessive and
they reclassify as a dividend. With an S corp this is not an issue
(although theoretically (sic?) your state could contest the salary if they
did not recognize S status for tax purposes).
David Abrams
Galactic Industries Corp
d...@galactic.com
www.galactic.com
Michael Hongslo wrote in message <1.dbf...@gate.net>...
>While I understand the difference between a C corporation and a S
>corporation. With a S corporation the profits or losses spill over into
>the principals personal taxes as dividend income. My question is at the
>end of the year, all profits or losses is to be distributed to the
>shareholders. How does a S corporation able to keep its money for cash
>flow and expansion? Or is there a way for shareholders to put the money
>back into the corporation without having the corporation considering it a
>liability, ie loan?
>
>Thanks,
>Mike
>
Robert McIlree
In article <1.dbf...@gate.net>,
"Michael Hongslo" <mhon...@nospam.visi.com> wrote:
>While I understand the difference between a C corporation and a S
>corporation. With a S corporation the profits or losses spill over into
>the principals personal taxes as dividend income. My question is at the
>end of the year, all profits or losses is to be distributed to the
>shareholders. How does a S corporation able to keep its money for cash
>flow and expansion? Or is there a way for shareholders to put the money
>back into the corporation without having the corporation considering it a
>liability, ie loan?
You can keep the money in an S-Corp, it's just a matter that the
shareholders have to pay income taxes on the profits. While in theory, the
money to pay said taxes should come from the S-Corp, it can come from
anywhere - since the tax liability is personal, not corporate.
S-Corp. tax returns account for money in corporate accounts that has been
previously taxed, but not distributed. You use previously taxed,
undistributed profits for cash flow purposes.
As a practical matter, no well-run S-Corp. distributes _all_ of its
profits to shareholders - it couldn't expand or would have massive cash
flow problems if it did.
However, taxes must be paid on the profits regardless, but that's not the
corporation's problem, per se - it's the shareholder's personal liability.
As for shareholders putting money into an S-Corp - you must be very
specific and document with the Corp. if you are loaning money to it (i.e.
promissary note, market rate of interest, payments made). Otherwise, your
dear Uncle would treat it as an infusion of capital - i.e. you just bought
more stock in the S-corp.
Bob McIlree
rjm...@ix.netcom.com
Gail Dobson
S-Corp income is not dividend income to the princpals, it is regular
income shown on principal's schedule C or E, I forget which. (Not to be
confused with distributions shown on the K-1.) It may be profit or loss.
Any remaining $$ in the S-Corp at the end of the year may remain in the
S-Corp account, but the principals must still pay income tax on it this
year. So by the middle of any given year, the S-Corp bank balance may
include $$ that the principals had already paid tax on the previous year.
However, that money will not be taxed on this year's 1040 because of the
way the 1040S is calculated.
I am not an accountant. An accountant could give you a much better, and
fuller explanation.
In article <1.dbf...@gate.net>, mhon...@nospam.visi.com says...
>
>While I understand the difference between a C corporation and a S
>corporation. With a S corporation the profits or losses spill over into
>the principals personal taxes as dividend income. My question is at the
>end of the year, all profits or losses is to be distributed to the
>shareholders. How does a S corporation able to keep its money for cash
>flow and expansion? Or is there a way for shareholders to put the money
>back into the corporation without having the corporation considering it a
>liability, ie loan?
>
>Thanks,
>Mike
>
--
Gail (gdo...@pchotshots.com)
PC HotShots, Inc.
Baltimore, MD
--> Let use bring out the *Power* of your PCs <--
finger gdo...@clark.net for PGP key
Steve Huston
I am not a CPA. I have an S corp and this is my understanding:
Michael Hongslo wrote:
>
> While I understand the difference between a C corporation and a S
> corporation. With a S corporation the profits or losses spill over into
> the principals personal taxes as dividend income.
It's S Corp profits, not dividend income. Unless you distribute the
profit as a dividend.
> My question is at the
> end of the year, all profits or losses is to be distributed to the
> shareholders. How does a S corporation able to keep its money for cash
> flow and expansion? Or is there a way for shareholders to put the money
> back into the corporation without having the corporation considering it a
> liability, ie loan?
At the end of the year, the profit gets swept into an equity account
named "Retained earnings". This keeps the money in the corp's bank
account for its use. Your personal tax return shows the S corp profit,
but you don't actually get the money. You have increased equity in the
corporation.
The corp can later write a check to you out of Retained earnings which
should not have to be taxed (since it already was, as S Corp profit on
your 1040). But I'm not real certain of this last part.
-Steve
--
Steve Huston Riverace Corporation
Email: shu...@riverace.com http://www.riverace.com
Specializing in TCP/IP, CORBA, ACE (508) 384-5708, FAX 384-3197
Expertise to help your projects succeed We support ACE!
rb...@home.com
An S corp is not required to distribute profits. Planning must be
done to determine many factors, such as, do you want to be an s corp,
do you need funds for future expansion, is it advantageous to be an s
corp and not distribute profits, etc, etc. These questions need to be
addressed. Any questions , just email me.
ron
mfe...@home.com
Dividend is a strong word my friend. In most accounting circles it brings
about the thought of "double taxation" that is, a dividend is taxed to the
company and then to the individual shareholder to be taxed at the individual
level. Thus the benefit of the S-Corp. An S-Corps shareholders pay taxes
on the "distributions", or profits from an S-Corporation, but do not
neccessarily distribute them. Like any company, they certainly can borrow
money or lend money as long as their is a business purpose.
The key point to remember is that while all of the profits from an
S-Corporation are taxable to the shareholders annually, but the
distributions are made as deemed appropriate by the Corporations governing
body (board of directors/shareholders vote) and can be as much or as little
as they deem appropriate.
Hope this helps,
Mike Feraci, EA visit our website (under construction)
http://24.3.17.21/mhrinc
Robert McIlree
In article <1.yf6...@gate.net>,
"David Abrams" <d...@galactic.com.nospam> wrote:
>Mike,
>
>You just leave the money in the corporation. You do not have to pay it
>all to the shareholders. Of course the shareholders still have to pay
>taxes on the money whether they get it or not. For example, say I am the
>only shareholder of a S corp that shows $1,000,000 in profit at the end of
>the year but chooses to keep all that cash for working capital. I better
>have a spare $400,000 around to pay my taxes. In reality the company can
>distibute $400,000 to me which I have all withheld as fed withholding tax
>and keep the remaining $600,000 for working capital.
Good point. When I incorporated as an S some years back, and money
(personal and corporate) was tight, the corp. distributed to me enough
cash to pay the tax bill, and kept the rest as working capital. I did this
for 3 years before the corp. became profitable enough to distribute more
cash in addition to meeting my S-Corp related tax obligations.
From the perspective of a single-or-low-number shareholder S-Corp., when
starting out, make sure that your business plans include having the corp.
distribute enough to you from profits to cover your personal tax
obligations with respect to the corp. and still keep the corp. running
smoothly. This is particularly important if you don't have other sources
of income other than the corp.
If your S-corp. is showing a loss for any particular year - all of this is
not an issue.
However, keep your eye on the corps. profit and loss statement
continuously during the fiscal year. Even a $25K profit to a single
shareholder (not at all hard to do in a well-run consultancy) triggers a
pretty stiff tax bill at the federal level - not factoring in any other
deductions you have on your personal return, or depreciation/Section 179
expenses.
> If a company plans to never pay
>a dividend then a C corp may be a better choice (esp since the nice
>politicians raised the personal rate much higher than the corporate rate
>for smaller sized companies.)
C-corps. that are consultancies get classified as Personal Service
Corporations by the IRS. The minimum corporate tax for a PSC is
automatically 34%. Under current tax law (unless something changed from
the recently passed bill that I'm not aware of), if your personal rate is
under that percentage - S is more attractive than C on that issue.
Bob McIlree
rjm...@ix.netcom.com
Tony Cox
Robert McIlree wrote:
>
> C-corps. that are consultancies get classified as Personal Service
> Corporations by the IRS. The minimum corporate tax for a PSC is
> automatically 34%. Under current tax law (unless something changed from
> the recently passed bill that I'm not aware of), if your personal rate is
> under that percentage - S is more attractive than C on that issue.
>
I was under the impression that "Personal Service Corporations" were a
special exception for lawyers, dentists, doctors, accountants, engineers
-- in fact, any business consisting of state-licensed professionals -- who
were until recently not allowed to incorporate because of the perceived
reduction in their "personal responsibility".
But driven by your post, I see that this group does also include
"consultants" (from the IRS 1120 1996 notes). Clearly, consultants are
usually not state licensed.
The two tests for "Personal Service Corporations" seem to be
1) "Substantially all" income derived from (pettyfogging, toothmongering,
quackery, etc. etc.) consultancy, and
2) 95% stock ownership by employees engaged in said field.
Both these tests must apply for a "C" corp to be a "PSC" corp, with the
extra 19% (0-$50K) and 9% (50-75K) penulty.
Now for the questions. (You might guess we have a stake in this).
Clearly, 2) above is definitive. However, 1) is open to interpretation.
First, what exactly is a consultant, in a world where a rat-catcher can be
a "rodent consultant". What delimits (say) a "software consultant" from a
"contract programmer"? Just the fact that the latter writes code whereas
the former tells others how to write code (and often ends up writing code
too)? Does merely the description of what your corporation does make a
20% difference in your tax rate? Does it matter how you invoice your
customers here? (Clearly, there are definitive answers to who is/who
isn't when the target corporation consists of state-licensed
professionals. For "consultants", however, it isn't so cut and dried.)
Second, what is the definition of "Substantially All"? If we get some
income from subcontracting (i.e. not income which stockholders
*personally* generate), how large does this have to be so as to fail the
"Substantially all" test?
What I'd like to find (and I have a horrible feeling that I'm not going to
be successful) is a 20-questions (a la 1099/W-2 quiz) list which will
allow us to determine in advance (i.e. not after an IRS audit, with
penulties and interest) whether we are a "PSC" corp or not. Or should we
sell 5.1% of our stock to a non-employee relative just to be absolutely
certain that we aren't?
regard
Tony Cox
(hope you can decode the e-mail address. posters to this group are
normally deluged
with junk mail, so I'm taking precautions).
David Ray
>
> S exists to deal with the problem which arises when the C corp pays a
> salary to the primary shareholder that the US/IRS decides is excessive
and
> they reclassify as a dividend. With an S corp this is not an issue
> (although theoretically (sic?) your state could contest the salary if
they
> did not recognize S status for tax purposes).
>
> David Abrams
> Galactic Industries Corp
> d...@galactic.com
> www.galactic.com
While your statment is correct with respect to this not being an issue with
S corps, it is most definitely NOT the reason for the existence of the S
Corp. The S Corporation was created solely as a means for a group of
owners to received the benefits of corporate status (limited liability,
mostly) while allowing them to be taxed as a partnership. The fact that it
eliminates the excessive salary issue is incidental; also, it is not
important in sheer numbers; few S-corporations are used for this purpose.
I might add, other than this small point, this guy's answer was the best of
the four I saw.....
cmcube
An S corporation operates much like a partnership.
1) the Profits and losses are NOT brought into the shareholders personal
income as dividends. The pro rata share of the Profit or Loss is taken as
ordinary income (assuming active participation in the enterprise) regardless
of whether or not any CASH has been distributed.
2) the anwser to your second part of the question depends upon a number of
factors.
Michael Hongslo wrote in message <1.dbf...@gate.net>...
>While I understand the difference between a C corporation and a S
>corporation. With a S corporation the profits or losses spill over into
>the principals personal taxes as dividend income. My question is at the
>end of the year, all profits or losses is to be distributed to the
>shareholders. How does a S corporation able to keep its money for cash
>flow and expansion? Or is there a way for shareholders to put the money
>back into the corporation without having the corporation considering it a
>liability, ie loan?
>
>Thanks,
>Mike
>