S-Corp or C-Corp

[geekgirldany]

I have a customer that I had spoke to earlier this year about incorporating. She came by a couple of weeks ago with her bookkeeping (after two months) saying she had incorporated. Did not tell me. Anyways I called her today to ask about filing form 2553 and who the shareholders are of the business. She said she doesn't want to be a S-Corporation she wants to be a C-Corporation. That the person (don't know who) that did the incorporation told her it would be better in the long run to be a C-Corporation.

Now I always thought it would be better for a small business to be a S-Corp. Especially since a C-Corp gets double taxed. I believe a C-Corp is taxed on the 15% of the first $50,000 and then it can go up to 35%. Then any dividends is taxed at capital gain rates which are low now but this could change in time.

I just wonder what you guys will recommend to a customer. S-Corp or C-Corp? I assume it really can depend as to how much income the business is generating.

Thank you for any help.

[Bees Knees]

There are several reasons why a C corporation might be better than an S corporation:

• Fringe benefits paid to owner/employee are not restricted.
• Double taxation of profits can be avoided by paying bonuses to owner/employee to wipe out any corporate level tax.
• In some cases, the new lower rate on qualified dividends combined with corporate level tax may actually be less than the pass through of S corp profits at the taxpayer’s marginal tax rate.

Each case is different. And there is no right or wrong answer to the issue. TTB, page 18-4 also provides some comparison information for your reading pleasure.

I usually talk people out of incorporating and go for the LLC. If there are no other employees, it avoids payroll taxes. It also avoids having to file a separate corporate return in the case of a single member LLC.

In most cases, people want to be a corporation for the liability issue. The fact is, single member corporations rarely benefit from the liability issue, as banks require the personal guarantee of the owner on any loans, and anyone filing a lawsuit against the company will also name the individual owner as well.

[Corduroy Frog]

Tax Advice

"the person (don't know who) that did the incorporation" was more than likely an attorney.

And clients usually consult with them instead of us. In my experience, most of them actually know very little about what is taxwise advisable for the client. Some of them say an "S corporation" is better, and then don't bother to file a Form 2553.

From what I've seen, I would say that 70-75% of small businesses are better off with a subchapter S. In my opinion, if the operation doesn't tie up a lot of capital, this percentage rises dramatically. TTB has a pretty good synopsis for different entity taxation schemes on page 19-2, and lists many advantages and disadvantages to the S election.

[JAinNC]

At least two attorneys in my small town who form corporations for clients advise them to see a tax professional very soon.

What I hate are the C corps that we advised 6 years ago to elect S status and they did not. Now he wants to elect S-corp even though things are very complicated .... and at this point will not necessarily save tax dollars.

I have some C corps that work well for the businesses they are operating. It does depend on which advantages fit their needs and goals.

[veritas]

Also you can choose

any fiscal year end with a C Corportaion.

[geekgirldany]

Thanks everyone for answering. I found that in the TaxBook after posting. I printed it out for my customer to read. She came by today and to my amazement had gone to another tax preparer. She had bought a business in 2006. Her and the seller had not come to an agreement on how much was goodwill, inventory, and/or non compete. She said assume goodwill. Which I did and which caused her COGS to be off. When I told her how much she owed and I thought it was the inventory she then said the seller said the purchase price included inventory. She didn't know it would effect her so much. I told her to get the agreement broke down and come back to me to redo the return. This was back in April 07.

Well she took her taxes to the seller's tax preparer and finished them with the correct numbers. Now she wants me to double check his return. This tax preparer is the one that told her to do a C-Corp. She is now going back to ask him why he said a C-Corp would be better.

My recommendation for her to do a corporation was based on the original numbers and I thought she could benefit tax wise on dividing between reasonable payroll and distributions. I see that C-Corp does have many advantages since the lower capital gain rates are now in place.

Frog all of my corporate customers are S-Corporations. I use to have a C-Corp but it was established in the 70s and is now closed.

JAinNC I could see how a C-Corp could work well for certain businesses. I will have to take a look at the taxes again for him now that have been redone and see if he is in this class.

I do her bookkeeping and have been paid to date. I'm glad because her going to another accountant surprised me.

Thank you all for responding. This board is so helpful to me.

[Corduroy Frog]

Two ends

Geek, I normally don't allow customers to play one tax preparer against the other. I guess I would need to know why this client went to another preparer. It could be that the seller's accountant was already so engrained into this situation that it was a natural progression. If so, I guess I would accept this explanation, and go from there.

If someone brings me someone's elses work to review, I simply explain that I prepare returns and I will be happy to prepare their return from scratch. Sometimes someone wants to pay me for 15 minutes work to "review" a 1040 that someone else has prepared. I simply tell them if I charge them, then the law requires me to sign the return, therefore I have to prepare a return.

I guess if one doctor tells them they have to have a $500,000 operation, they will seek a second opinion. (I suppose I would too) So they try to approach their taxes with the same mentality.

[geekgirldany]

Thanks Frog. I had thought since she was a regular monthly bookkeeping customer and had already paid me for doing the original return I would look over it for no charge. I am having doubts now because this thing can't go back and forth with her telling him I said this... and her telling me he said that. I can understand why she might go to someone else as a second opinion. But when you hear that you are like Scooby Doo "Huh Shaggy!" I have never reviewed returns for correctness before and I am not sure I should change now.

[geekgirldany]

Since I already have this thread going I won't start another one for this question.

Is a non compete clause amortized over 15 years?
From researching it appears that it is a Sec 197 like goodwill that must be wrote off over time. This preparer has deducted it in one year as a regular expense. I believe you use to could do that but it changed in 1999.

I've also find no change in COGS. No beginning or ending inventory. My original ending COGS is listed.

I told my customer before she left I want to see their agreement breaking down the purchase price. Should have that tomorrow.

[BOB W]

I have .....

...... a problem with C Corps, mostly because of my client base> small businesses.

I can never trust some of them to do the right thing when it needs to be done. C Corps require tighter follow up on my part as well, especially if it has a year ending in Nov, Dec, Jan or Feb when I'm at my most busiest time of the year. C Corps should have a Sept year end. Audits on C Corps can create a multiple level tax problem.

Other than that, I have no problem with C Corps............

[S T]

Amortization

Yes, Non compete amortized over 15 years along with Goodwill, Sect 197. I think I have always amortized non compete, but not sure, haven't had any in a while.

As I am sure you are aware form 8594 needs to be filed with the buyers and the sellers tax returns. Hopefully they match and they have agreed upon the allocation of the sales/purchase price. This information will assist you in establishing the goodwill, non compete, equipment values and any inventory!

Appears as tho you might have to dig a little deeper in reviewing her return that was completed by the sellers tax service.

Sandy

[geekgirldany]

Thanks Sandy and Bob.

I haven't had to deal with non compete in awhile either so I wanted to double check. The TaxBook has it as a covenant not to compete. So also double check that a non compete agreement is the same.

Sandy thank you for the reminder. I told my customer that the seller and buyer need to file a form with the IRS showing what the purchase price was allocated to. I suppose she just didn't know this would play such a big part in her taxes. There is no form 8594 attached on the new return she handed me.

Yeah I am going to have to dig into this a little more. Hopefully the final agreement will make things more clear. This agreement wasn't finalized until after May 2007.

[S T]

CNC or non compete

I believe they are one in the same, just verbage shortened.

From Wikipedia - here is the link http://en.wikipedia.org/wiki/Non-compete_clause

Sandy

[Uncle Sam]

S Corp/C Corp

Form 8594 is attached only to the respective returns in the year the purchase/sale agreement was reached - not before. So if the deal didn't close until 2007 - you wouldn't find it on the 2006 return.

[dsi]

Before you get too far with doing anything else for this client, you should request a copy of her corp records - articles, minutes, etc.