Transform Your Business with S-Corporation Tax Strategies

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Unlock the secrets to elevating your business's financial health with seasoned CPA, Eric Bonney, in a riveting discussion that could change the way you think about S-Corporations. Ever wondered if the time is ripe for your enterprise to make that strategic S-Election move? This episode serves up a wealth of knowledge, covering the substantial tax benefits and the perfect income threshold that could herald the right moment for your business's transition. As the founder of Harvest Tax and Accounting Services, I draw on over 28 years of experience to guide you through this potentially lucrative decision.

The complexities of an S-Corporation don't escape us in this engaging chat; you'll gain insight into the responsibilities that come with the status, such as reasonable compensation and shareholder eligibility. I'll also navigate you through the essential year-end reporting of health insurance premiums for significant shareholders—a critical move for maintaining compliance and reaping the benefits of your S-Corp status. Whether you're a sole proprietor ready to expand or a partnership eyeing a new tax structure, this episode is tailored to empower you with informed tax considerations that could steer your business towards a more prosperous future. Join us for an indispensable conversation that's less about bean counting and more about bean multiplying!

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Episode Transcript

Speaker 1 (00:03):
Welcome everyone to Espresso Tax and Small Business
Essentials, where we are brewingup success for the owner-led
entity by providing education onuseful tax strategies and other
essential business topics.
I am your host, eric Bonney,founder of Harvest Tax and
Accounting Services and a CPAwith over 28 years of experience
servicing business owners likeyourself.
Each week, I will take a lookat the most pressing tax issues

(00:26):
and business questions thatsmall business owners are facing
.
Today we're going to discussthe S-Corporation and why and
when it might be a good time tomake an S-Election.
So why would you want to chooseto be taxed as an S corporation
?
The biggest benefit to beingtaxed as an S corporation is

(00:47):
going to be because, as thebusiness owner, you are no
longer going to be subject toself-employment tax that is
typically incurred if you have adifferent type of an entity,
such as if you are a disregardedentity, if you're a sole
proprietor or if you are ageneral partner in a partnership
.
When is the best time to makethat decision is really going to

(01:12):
be dependent on the facts andcircumstances specific to your
situation.
Typically, in our firm, we'llhave a threshold of income that
we like to see from a soleproprietor or a disregarded
entity that we would like to seethem having on a regular basis
to make sure that, after we makethe S-election, that we aren't

(01:35):
incurring additional fees andadditional complexity without
having enough of a tax savingsFor our firm.
Typically, that's going to besomewhere in the $70,000 to
$75,000 in net income on aregular basis, but every firm is
going to have a differentchoice and a different time when

(01:55):
they're going to make thatdecision.
What are some of the downsidesto making an S election and why
might we not want to make an Selection?
Well, there's already going tobe some additional complexity
depending on if you are alreadya disregarded entity or if you
were a partnership and you'redeciding that now you want to be
taxed as a S corporation.

(02:16):
That additional complexity isgoing to be that, as an active
business owner, you are going toneed to put yourself on what is
called reasonable compensation.
So if you did not already havepayroll going on in your
business, now you're going toneed to have payroll.
Whether you do that payrollinternally yourself or you use
an online or a local payrollcompany really, again, is going

(02:40):
to be up to each individual, butyou will need to make sure that
you are paying yourself or anyof the active business owners a
reasonable compensation.
Now that reasonablecompensation does not need to be
paid every week or every otherweek.
The only stipulation is that bythe time you get to the end of
your calendar year or fiscalyear, you must have some type of

(03:03):
payroll that is paid in on aW-2 for the active business
owners.
Some of the other downsides toan S-corporation are that there
is a limitation to who can be ashareholder in an S-corporation
Typically that has to besomebody that is a US resident
or US citizen and there arelimitations to the number of

(03:27):
shareholders that anS-corporation can have, and that
limitation is typically at 100shareholders.
Now, most of the partners thatwe deal with in our firm, they
don't have that issue.
But if that is going to be anissue or you think that you are
going to be going out andbringing in some significant
funding and that is going torequire that the people coming

(03:50):
in that are going to be makingthose contributions are going to
be equity owners of the entity,then probably would want to
have a conversation with yourtax professional about a
different vehicle outside of anS Inside an S corporation, if
you've got a greater than 2%shareholder who is getting some
type of benefits from the entitytypically we're talking about

(04:12):
health insurance benefits or ifyou have a vehicle that is
inside the company that is beingused by that particular owner,
then that adds some additionalcomplexity as well.
If you have health insurancethrough the business, then you
need to make sure that by theend of the year you have
reported the insurance premiumsthat were paid for by the

(04:35):
business on behalf of thatgreater than 2% shareholder.
You need to make sure that youreport that on your W-2 and make
sure that you get thatinformation over to your payroll
provider in a timely fashion.
But, as I mentioned earlier,there are some significant
savings that can be had if youdo make the S-election because,

(04:59):
outside of the owner'scompensation that they get paid,
everything else is going tocome to the business owner,
either in the form of adistribution from the S
corporation, which is typicallygoing to come to them in a
tax-free method, or it is goingto be reported to them on a K-1,

(05:20):
and all of the income that isreported to the business owner
on a Schedule K-1 is going to benot subject to self-employment
tax and that is the additional15% tax that you would be paying
if you were either a generalpartner in a partnership or if
you were a sole proprietor.
Filing a Schedule CS-corporations can be a very

(05:45):
good tool to allow for bettertax mitigation and better tax
planning with your professional.
I would highly encourage you tohave a conversation with your
tax professional to find out ifthe S-election and being taxed
as an S-corporation is going tobe in your benefit and if it
would be something that wouldmake sense for you to do.

(06:07):
Thank you for joining me todayfor this episode of Espresso Tax
and Small Business Essentials.
Don't forget to sign up for ourmonthly newsletter and if you
have a specific topic that youwould like to hear me cover here
on the show, please send me anemail at espressotax at
harvestcpafirmcom.
There are links in the shownotes for both the monthly

(06:29):
newsletter and how to request atopic.