Entity Choice Information
With consideration to the tax laws that were recently enacted, here are some highlights of the various entities for businesses where you own at least 2%.
C Corporations
Tax:
You must file a separate tax return for the company – a business return.
The first $50,000 of income is taxed at a 15% Federal tax rate.
However, Illinois’ tax rate is almost 10% and other states may have significant tax rates.
There may also be double taxation on a sale if there are significant assets in the corporation.
You, as a shareholder and employee, can take out compensation and stock dividends; the dividends are NOT deductible to the company but ARE taxable to you.
Payroll Taxes:
Your company must file Federal and Illinois payroll tax returns as well as State and Federal unemployment tax returns.
Employee Benefits:
Health insurance, disability insurance and unreimbursed medical (subject to limits) are deductible. You can participate in the company profit sharing, 401(K) salary deferral and/or pension plan.
Auto – Business:
If you have a company car, the company pays 100% of the expenses and depreciates the car. You will have an amount for personal use reported on your W-2.
Home Office and Other Business Expenses:
Home office expenses are not deductible by the company. Home office and unreimbursed business expenses are reported as miscellaneous itemized deductions on your personal return (subject to limitation and includable in calculating Alternative Minimum Tax).
S Corporations (and LLCs electing to be taxed as S corporations)
Tax:
You must file a separate return for the company – a business return.
Net income from the company is passed through to your personal return on Schedule K-1.
The company generally pays no Federal tax and a small percentage of State income tax.
NOTE: You must take a reasonable salary; the IRS is not happy with companies where shareholders/employees take little or no salary and just report the company income. This is a method of avoiding payroll taxes that is not advisable.
Payroll Taxes:
Same rules as C corporations.
Employee Benefits:
Health insurance premiums are added to a shareholder’s W-2 and are deducted at the bottom of the personal return. There is NO company deduction for disability insurance and unreimbursed medical expenses. You can participate in the company’s profit sharing, 401(K) salary deferral and/or pension plan.
Auto – Business:
Same rules as C corporations.
Home Office and Other Business Expenses:
Same rules as C corporations.
S Corporations – Additional Information:
If your company has substantial goodwill and appreciated assets, an S corporation election will prevent double taxation at the time of sale.
If you have shareholders who do not work in the company, they can receive distributions of income from the S corporation as a percentage of their ownership.
Currently, S corporation pass-through income is not subject to the additional tax on investment income that some higher income taxpayers may pay.
Partnership and Limited Liability Company (LLC)
NOTE: LLC owners are called Members
Tax:
IF you are the only member of an LLC, you can report income and expenses on your personal income tax returns and not file a separate business return.
If you have other members in an LLC – and for partnership returns, a separate return is filed – a business return is required.
Net income from the company is passed through to your personal return using information reported on a Schedule K-1.
This income is generally considered to be self-employment income.
Payroll Taxes:
If there are no employees (other than partners or members), there are no payroll tax returns to file – as well as no unemployment taxes to file and pay.
You will include self-employment tax with your income tax liability on your personal return.
Employee Benefits:
Health insurance is deductible as an adjustment on page 1 of your personal tax return. There is no company deduction for disability insurance and unreimbursed medical expenses.
You can participate in a profit sharing, 401(K) deferral and/or pension plan as a self-employed person.
Auto – Business:
The business use of an auto is deductible directly against LLC and partnership income.
Home Office and Other Business Expenses:
Home office expenses and unreimbursed business expenses are deducted directly against company K-1 income. These deductions decrease both taxable income and self-employment income.
Sole proprietor
Tax:
You report company income and expense on your personal income tax return on Schedule C.
Payroll Taxes:
Same rules as partnerships and LLC members.
Employee Benefits:
Same rules as partnerships and LLC members
Auto – Business:
The business use of an auto is deductible directly against company income.
Home Office and Other Business Expenses:
Home office expenses are deducted directly against company income.
Business expenses are included in the expense section of Schedule C.
NOTE: With all entity forms, especially a sole proprietor, make sure that you have sufficient insurance coverage to protect you.
For help with your business entities call Linda Forman at (847) 316 – 1040 or LFormanCPA@aol.com today.
