Auto lease to S-Corp.

[Gretel]

In a printed copy from an earlier thread I find the following info:

The S-Corp issues a 1099-Misc to the S/H showing the monthly lease payments in box 1.

I think this should be box 3 since equipment lease is not supposed to be reported on Schedule E.

That brings up the question what the advantage is for a S-Corp to have a lease agreement. I can see that it saves SE taxes for Sch. C, but S-Corp income is not subject to SE anyway.

[Bees Knees]

True, there is no SE tax issue. But there is a FICA tax issue for the shareholder/employee wages.

For example, shareholder/employee is on salary for $60,000 per year and supplies his/her own tools and equipment. $60,000 is subject to FICA, even if the employee can deduct the cost of tools and equipment as unreimbursed employee business expenses.

Or...

Shareholder/employee is on salary for $50,000 per year, plus receives $10,000 lease payments from the S corp for leasing his/her tools and equipment. $60,000 (minus expenses) is still subject to income tax, but only $50,000 is subject to FICA.

[Gretel]

..so, in other words this is part of the compensation package for reasonable compensation.

That makes sense but does not apply to my client who wants to max his FICA for later (don't laugh) SS payments.

[AuditorTurnedGood]

Maxing out FICA... I've heard of a few people whose goal in life is to hit the maximum taxable earnings for SS before. (I guess I wouldn't mind having that kind of good problem either)

ATG

[Bees Knees]

TTB page SB14-3 contains the calculation of how average earnings affact your Social Security Benefits.

Computation of the Primary Insurance Amount for a Person
First Eligible in 2008
Average indexed monthly earnings
90% of the first............................................. ............................. $711 plus
32% of the amount between................................... $711 and $4,288 plus
15% of the amount over.............................................. ................... $4,288

It then gives the following example:

Example: Michael turned 66 in 2008 and had average indexed monthly
earnings of $6,008 based on his highest earning 35 years. Michael’s
monthly benefit is as follows.
1) 90% × $711 = $ 639.90
2) 32% × ($4,288 – $ 711) = $ 1,144.64
3) 15% × ($6,008 – $4,288) = $ 258.00
Total monthly benefit = $ 2,042.54
Note: The maximum monthly benefit for 2008 is
$2,185, regardless of income.

[Bees Knees]

In the cited example, Michael’s top $1,720 in average earnings only increased his monthly benefit by 15%, whereas his bottom $711 in average earnings increased his monthly benefit by 90%.

So lets say instead of earning $6,008 in average monthly earnings over his best 35 years, he only averaged $4,288. His monthly benefit drops by 15% of the difference. Thus, instead of receiving $2,042.54 per month in Social Security Benefits, he receives $1,784.54 ($1,720 x 15%), a drop in benefits = $258 per month.

Keep in mind, between his share and his employer’s share of FICA, that extra $1,720 per month in average earnings cost $263.16 in FICA taxes. ($1,720 x 15.3%). Thus, he and his employer paid $263.16 per month in taxes so that he could receive and extra $258 per month in benefits upon retirement.

Now do you think maxing out FICA makes sense?

[Edsel]

Time Factor

Sorta paints the picture, Bees Knees.

And that doesn't even count the time value -- the fact that he may never
live to collect it, and even if he does it may be several years in the future
for the privelege of collecting less money.

Giving my age away, but on my first job I reached the FICA limit at $3600.
Everyone reached it back in those days and sometime in May or June,
FICA quit coming out of people's paycheck.