Most businesspeople prefer the protection of a corporation as opposed to a sole proprietorship or partnership. Corporations are a good choice because your personal assets are protected against any liabilities incurred by your business. The two types of corporations you can choose as a business entity are a C-Corp or an S-Corp.

You would lean toward an S-Corp entity if you desire a traditional management model with a limited amount of shareholders. S-Corps have established precedent with the IRS and through the courts. Shareholders and investors are attracted to S-Corps because the law allows a tax flow wherein they can use start up losses to offset tax liability from other income. Setting up an S- Corp will cost you $100 to $400 depending on your locale.

An S-Corp is limited to 75 shareholders. These shareholders have to be United States citizens or resident aliens. S-Corps do not have multiple classes of shares. Also, a percentage of the corporate income must be paid toward Social Security and Medicare taxes in an S-Corp. (more…)

S-Corporations are not obligated to pay federal corporate income taxes, but they must file an income tax return. They file an Internal Revenue Service form 1120S to report profits and losses. The shareholders file K-1 forms and report profit or losses on their individual income tax returns.

S-Corp salaries and bonuses are taxable as income, but there is no self-employment tax applicable to an S-Corp. (more…)

S-Corporation owners get paid in salary and in a percentage of the profits. It makes sense for the S-Corporation to pay shareholder-employees a low salary because paying the profits out as a wage makes that wage subject to Social Security and Medicare taxes, while dividend payouts are not subject to these taxes. So, the less profit the S-Corporation pays in wages, the less its tax liability becomes.

Be aware, however, that the Internal Revenue Service is aware of this practice and maintains a right to re-categorize dividends as wages, in the event they determine your salary standards are set too low on purpose. (more…)

An S-corporation designation is favored for small business. The S designation is in reference to subsection S of the tax code defining corporate taxation. When determining whether to go with an S-Corp or C-Corp designation for your business, it is important to note that the major difference between the two is that an S-Corp has flow through to your personal income tax return and can, therefore, be used to help offset other sources of income.

Another difference is that only a C-Corp can go public. This is something to consider in the event that you are planning to take your business public in a few years. Also, conversion from an S-Corp to a C-Corp (more…)

You can name a beneficiary to your IRA and thereby stretch the IRA benefits to the next generation. This sounds nice, but a plan to stretch your IRA can fail.

Some IRAs require a fast distribution of assets after the depositor’s death. This can generally require that all assets be distributed in 5 years, in reference to non-spousal beneficiaries.

The other problem is the beneficiaries themselves. If you leave an IRA to stretch for your children, there is nothing to stop them from withdrawing all the money in one lump sum, paying the high tax penalty and going on a spending spree. (more…)

There are limits and restrictions when you file itemized deductions.

The first type of limit to an itemized deduction is called a floor. A floor is a minimum of deductions you must reach before starting to receive any benefits. Therefore, your benefit is received for the amount of deductions you make above that floor.

There is a floor for medical expenses. The floor is equal to 7.5% of your adjusted gross income. So, if your AGI is $100,000, you will receive benefits only for medical expenses above $7500.

There is also a floor for miscellaneous itemized deductions. This floor is equal to 2% of your adjusted gross income. So, if your AGI is $100,000, you will receive benefits only for those miscellaneous expenses above $2000. (more…)

When speaking about taxable accounts, I am referring to those accounts into which you deposited money after taxes. Personal accounts like checking and savings fall into this category. There is no tax advantage to having these accounts, as dividend and interest earnings are taxed annually. So, the term taxable account, applies to these sorts of accounts, for which there has been no tax deferment.

It is better to withdraw from these types of accounts for living expenses, etc. in retirement. This will help sustain the wealth in your tax-deferred accounts and allow them to continue growing.

If you did not have to withdraw money from either your taxable or tax-deferred accounts for retirement, your tax-deferred accounts would grow more quickly than the taxable accounts. That is because of the rate at which the tax-deferred accounts compound. However, if you have to withdraw from those accounts, you lose part of the return. (more…)

When it comes to your child’s education, you should be thinking about putting together the money they will need for college at birth. College tuition is only going to go up over the next seventeen to eighteen years, and you want to have a plan in place to pay for your child’s education. Here’s a simple option you can use to get started.

You can begin by opening an educational savings account. You can deposit up to $2000 annually per child into such an account. This is a combined total, so any money from grandparents or other interested parties is placed in this account and cannot exceed $2000 a year. The money is not pre-tax, but it can be withdrawn tax-free as long as it is spent on educational expenses.

Educational expenses are determined to be books, fees, supplies, tuition, room and board, and anything directly associated with your child’s education as long as he or she is at least a part time student. (more…)

The IRS has set many tax deductions and benefits in place for taxpayers. Unfortunately, some taxpayers who earn a high level of income can see these benefits phased out as their income climbs.

For example, if you earn under $100,000 annually, up to $25,000 of rental income losses qualify as deductible, and you can save thousands of dollars on other income origins through this deduction. However, if you earn over $100,000 a year, this deduction begins to phase out, until it is completely gone for taxpayers earning $150,000 and above annually.

Here are some suggestions for those whose income is too high. (more…)

No one wants to receive an IRS audit. If the IRS discovers a discrepancy in your return, it could lead to future problems. If you find discrepancies in a previous return, the best thing you can do is file an amended tax return.

An amended tax return is usually filed if you need to make revisions to a previous tax return. Most people file an amended tax return because they need to correct their filing status. This will allow them to claim the deductions that were missed as a result of filing in the wrong status. (more…)