Chapter 4 Introduction
By Jason Watson, CPA
Posted February 28, 2020
Not everything that glitters is gold so there are a handful of downsides, some manageable, to the S Corp election or having an LLC. A lot of these examples stand alone, and some of these depend on the net income of the business and other external factors. WCG can help guide you through the decision-making process.
And No, there are not 185 reasons- it was just a self-proclaimed catchy number. Most of these reasons in the beginning of this chapter focus on S corporations. However, there are some general pains with having any type of formalized entity, and those are near the end.
Specifically, in this chapter we will review these disadvantages to having an S corporation-
- Increased cost (tax preparation, payroll taxes)
- SEP IRA limitations
- Trapped assets
- Disparate distributions
- Other W-2 income
- State taxes
- Among other smaller issues
Specific to S corporations, we ask these general questions of each business owner before diving into the nitty-gritty-
- Does your business earn over $30,000 net income after expenses? Say Yes.
- Are you located in New York City or Tennessee where S corporation tax rates are egregious and suck up all the Federal tax savings? New Hampshire? Say No.
- Do you have other W-2 income that exceeds or comes close to exceeding the Social Security limits of $137,700 (for the 2020 tax year)? Say No.. If you say Yes, we need business income to exceed $250,000 in #1 above.
- Is this a going concern? In other words, is the business going to continue to earn the same income or more each year? Say Yes.
- Do you have an LLC or some other entity in place that can be elected to be taxed as an S Corp? Say Yes. If you say No, we have options just not elegant ones.
Are you still here? Excellent news… then read on!
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