• Skip to content
  • Skip to primary sidebar

Header Right

  • Home
  • About
  • Contact

How to Milk Your S corporation – Tax Free

March 1, 2022 by Boris Musheyev

3 Money Making Tax Deductions You Aren’t Taking Advantage Of.

Before we jump into this mind-blowing topic: How to milk your S corp tax-free. I want to quickly go through what an S Corp is and how it works.

What is an S Corporation?

An S Corporation is a business entity that has elected to pass its corporate income, losses, credits, and deductions to its shareholder(s). S Corps don’t pay income tax. Instead, the company’s individual shareholders split up the income amongst each other and report it on their own personal tax returns. 

Unlike a sole proprietorship, S corporations are legally separate entities from its owner. It provides a layer of protection for your personal assets in the event your business can’t pay its debts or gets sued.

In simpler terms, It’s a way of forming a business so that it avoids double taxation – as compared to C-Corporations. S Corporations have all the advantages of a corporate business structure while allowing the profits and losses to pass through to the shareholder(s), thus avoiding double taxation

There are a lot of pros when it comes to structuring your business as an S corporation. And this is the most popular entity when it comes to small businesses. If you didn’t know, the term S corporation means, small business corporation. 

With that being said, it’s important to know what entity you have your business registered as. Most people think they automatically have their business registered as an S Corporation. But when you form a corporation in the United States. You’re automatically a C corporation – not an S corporation.

Unless you’ve filed form 2553 to elect to change your C corporation to an S corporation, then you might be making this mistake. Double-check with your tax planner to make sure you’ve filed form 2553 to become an S corp. 

How to pay yourself properly in an S corporation. 

The aim of an S corporation is to pay less in taxes, right? So how exactly do you go about paying yourself while staying out of trouble with the IRS?

First things first, you need to pay yourself a reasonable compensation. The keyword here is reasonable. The IRS requires S corporation owners to be paid a reasonable compensation. Basically, it needs to be comparable to what other businesses are paying within your industry. 

There can be pricey consequences if the IRS determines that a shareholder’s wage is not reasonable. You could be penalized for neglecting to withhold and deposit employment taxes. And be required to back pay the taxes that were not reported. 

Next, once you max out your reasonable compensation from your S Corporation, you may now take out distributions that are NOT taxable since S Corporation is a pass-through entity. Again, this means that it passes its income/losses to its shareholders.  

In a nutshell …

  • You don’t want to be taking a huge salary, but pay yourself a reasonable compensation. 
  • You pay payroll taxes on your salary, like any other employee.
  • You don’t pay payroll taxes on any dividend distributions from your S corp.

Payroll taxes are 15.3%! So any income you take as a distribution rather than a salary saves you that cost in taxes.  

Now that we’ve reviewed the basics of an s corp. Let’s talk about tax deductions and tax planning.

What is a tax deduction and how does it work?

A tax deduction lowers your taxable income and therefore reduces the amount of taxes you pay. 

The first rule of thumb for tax deductions, any expenses that directly or indirectly relates to your business is a tax deduction. As long as it is ordinary and necessary for your business.

But, some tax deductions aren’t so black and white. And you could be missing out on deductions that a tax planner is able to legally create for you. I can guarantee you, that your tax preparer will not know how to take advantage of these tax strategies.  So if you haven’t already it’s time to get a tax planner on your team. 

The first step to milking your S corp tax-free is drawing up an accountable plan. 

What is an accountable plan?

An accountable plan is a document that states how an employee is reimbursed for expenses and/or receives an allowance to cover expenses. 

These expenses must be business-related, of course. These can include (but are not limited to) expenses related to: 

  • Travel
  • Meals
  • Lodging
  • Entertainment 
  • Transportation 

Businesses must have an accountable plan so employees don’t get taxed on reimbursed expenses. All money that is reimbursed by a company should be done on a W2 – which is subject to payroll tax unless you have an accountable plan in place.

An accountable plan is super simple to put in place. No, you don’t need to submit a written plan to the IRS. But you do need to prove that you have defined your terms for reimbursing employee expenses. 

This can easily be put together in writing with the help of a tax planner. 

Let’s dive into our first juicy deduction using the accountable plan…

Strategy #1: Home Office Deduction.

The work from home erra is far from over. And it’s important for your bottom line to know how to take advantage of all the deductions available to you. 

It’s essential that the terms of your home office deduction are outlined in your accountable plan. Additionally, there are two key requirements that you must meet to claim the Home Office Deduction. 

1.Regular and exclusive use.

You must regularly use and allocate part of your home for conducting business. You’re not able to deduct your entire house. But, if you have a designated room for your home office then you can take a home office deduction for that room. 

2.Principal place of your business. 

Even if you carry out business at another location. You can deduct your expenses for part of your home that is exclusively used for business. 

You can also deduct expenses for a separate free-standing structure. Such as a studio, garage, or barn, if you use it exclusively and regularly for your business. And the structure does not have to be your principal place of business.

How does the home office deduction work?

Your business has to reimburse you personally every month for all your home office-related expenses. 

This is done exactly the same way you would reimburse your employees for business-related expenses. You save the receipts and your business will cut you a check for those expenses. And most importantly when your business reimburses you, you do not pick this up as income. 

These deductions include, but are not limited to:

  • Utilities
  • Internet
  • Mortgage changes
  • Property tax
  • HOA Fees
  • Cleaning fees
  • Any repairs that affect your home office

The home office deduction is a great way to score extra tax savings that you aren’t taking advantage of. I recommend getting together with your tax planner to make the most of this tax deduction. 

Strategy #2: Putting your Kids on Payroll.

Putting your kids on payroll? Yes, as crazy as that sounds, you can hire your kids… for more than tax savings.

You can teach them:

  • The ropes of your business.
  • How entrepreneurship works.
  • Help them develop strong work ethics.

 All while earning tax-free income!

Let me teach you how to hire your kids the smart way.

Each of your children can be employed by your business and makeup to $12,950 (2022) tax-free. As a matter of fact, anyone in the United States does not pay taxes on a reported income of $12,950 or less.

Your business will be able to take the deduction, thus decreasing your tax liability. And your child will not pay any federal taxes.  

Yes, you will still have to pay payroll tax, but the overall tax savings still outweigh the cost.

There is no age requirement when hiring your kids. But, one thing to remember: it needs to make sense. Don’t hire your 5-year-old son to take care of the business finances. #1 it’s a terrible idea because he is just learning basic math and #2 it will not fly with the IRS. 

For example, a client of ours hired their 12-year-old daughter to help out with social media management. She’s on Instagram and Facebook all day, every day. So you could say it was a job match made in heaven.

But don’t worry, there are endless skills for your children to learn in your business. CRM management, filing, cleaning, sales … I mean who would turn down a deal from a cute kid?

Strategy #3: Section 127 – Tuition Reimbursement. 

Section 127 states that employers are allowed to provide tax-free payments up to $5,250 per year to their employees. The following education expenses are eligible to be reimbursed: 

  • Tuition
  • Books
  • Supplies
  • Educational fees

Up until 2020 student loans were not eligible to be reimbursed under Section 127. But, The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides an expansion to  Section 127. The expansion allows employers to include student loans for the years 2020-2025.

Section 127 and the expansion of The CARES act serve as another juicy tax deduction for your S corporation. And it’s not subject to additional taxation for your employees. 

Before you start providing these reimbursements. It’s important to understand the requirements of Section 127. And always consult your tax planner before you put anything new in place.

1.The employer must have a written educational assistance plan.

Like how you have a written accountable plan, you need to have a written plan that outlines terms of your EAP. There are a few tax variables to consider. We recommend consulting with your tax planner to help with this.

2.No discrimination towards some employees

The terms of your written educational assistance plan can’t discriminate against some employees. You must offer it to all of them. Meaning, you can’t favor highly compensated employees. Or only put it in place for your children. With that being said, you can state terms that say you don’t want to include student loans. Only current educational expenses, or vice versa. 

3.An employee may not receive more than $5,250. 

If an employee has multiple employers and they’re both offering this benefit. They’re only eligible to receive a total of $5,250 from all employers. 

4.No choice of cash benefits

An employee can’t be given the choice of receiving taxable compensation or education assistance. The IRS does not consider education assistance as part of taxable income. This would mean that the employee would have to pay taxes on something that is not taxable in the first place.

5.Spouses or dependents of employees are not eligible.

Only employees that work for the business are eligible to receive this reimbursement. 

6.Employee Notification

You must notify any employees who are eligible for the educational assistance program. But, you don’t have to provide a special form or document. Typically employers will use their written education assistance plan. Or some companies use this section as an incentive for making it part of their benefits package.

You’re also able to do this with your own children. Remember how we touched on hiring your kids into your business? Well, if your child is over 21 and fits the terms for your written education assistance plan. Then they can take full advantage of the $5,250 reimbursement. 

Therefore, once your kids hit the age of 21. You can hire and pay them $12,950 that’s tax-free. And pay them an additional $5,250 that’s free of payroll and income taxes.

This is what I call a prime example of milking your S corporation for tax benefits.

How to take full advantage of all these tax deductions?

If you want to take full advantage of these tax deductions and significantly reduce your tax liability. And I mean, significantly reduce your tax liability … then you need to get a tax planner.

There’s a big difference between a tax planner and a tax preparer. Almost every business owner has a tax preparer to file their year-end taxes. But your tax preparer won’t tell you about these tax-saving strategies. 

Tax preparation is only about putting the right numbers in the right boxes. But if you really want to minimize your tax liability and pay yourself through your tax savings, then you need tax planning.

If you’re curious about how the strategies can fit into your business, tap here to book a free tax strategy session.

Filed Under: S Corporations, Tax Planning, Tax Strategy Tagged With: s corporations, tax deductions, tax planning, tax strategy

Multiple Businesses in Multiple S Corps – Is this a Mistake?

February 25, 2022 by Boris Musheyev

When it comes to structuring your business, a lot of people think that S Corporations are the way to go. And in most cases that’s correct. If you’ve already read my book, you’d know I’m a huge advocate for S Corporations. It‘s an excellent way to structure your main operating business and take advantage of legal tax strategies.

Don’t get me wrong, my opinion hasn’t changed. S Corporations are still generally the way to go for your main operating business. But when you start putting multiple businesses into S Corporations. Because you heard that S Corporations are the best entity when you have multiple entities… it’s a problem for your bottom line that you aren’t even aware of. 

It’s not unusual for business owners to create a multiple business entity structures to hold multiple business affairs. But in order to avoid paying any additional taxes when forming these entities. All tax consequences should be carefully considered with a tax planner. Always consult a tax planner when choosing what type of business entity will work best for you.

Before we jump into this tax strategy, I want to talk about this …

The Big Guy vs the Little Guy. 

Whether you’re a little guy, who makes a couple hundred thousand every year. Or a big guy whose taxable income is 10 million. They both make the same mistakes with how they structure their entities. 

Just because you’re a small business owner doesn’t mean that the mistakes you’re making aren’t the same that the big guys are making. 

We have plenty of clients who are in that area. We have clients that are planning to go public but are delayed because they have entities that are structured incorrectly. We’re working on tax planning and restructuring their entities. So they will be able to go public while taking full advantage of legal tax strategies that are available to them. They make the exact same mistake that you would be making when it comes to structuring your business. But it’s easily avoidable when you have a tax planner on your side. 

What’s the benefit of having an S Corp?

S Corporation is a business entity that has elected to pass its corporate income, losses, credits, and deductions to its shareholders. S Corps don’t pay income tax. Instead, the company’s individual shareholders split up the income amongst each other and report it on their own personal tax returns. 

In plain English?
It’s a way of forming a business so that it avoids double taxation as compared to C corporations. 

What’s the biggest problem with having multiple businesses within multiple S corporations?

 Having multiple S corporations comes with paying MULTIPLE social security taxes. 

And who wants to do that!

The IRS assigns every business structure a default tax treatment that determines how your business is taxed. Think of it as a set menu at a restaurant with no substitutions. 

And in the United States we have all different kinds of taxes:

  • Federal tax
  • State & local income taxes
  • Property Taxes
  • Payroll taxes
  • Social security
  • Medicare Taxes
  • Estate Taxes
  • Sales
  • and there’s more …

S Corporations don’t pay income taxes and they avoid double taxation. Unlike their friends, C Corporations. But they’re taxed on profit that is passed over to each shareholder. 

Now, imagine this ….

You’re not a business owner, and you work a job. Once you reach $147,000/year is when you will stop paying social security tax. Imagine you have multiple jobs and each is paying you $147,000/year, $147,000/year, and $147,000/year. You will pay some social security taxes on ALL these jobs. But you will get a refund at the end of the year for overpaying social security. (Which maxes out at $147,000/year).

However, the employers that you work for will not get a refund for the taxes they paid. Each of them will pay their portion of payroll taxes. 

Meaning, when you own and run multiple businesses under S Corporations. You will not only have to pay for yourself a reasonable compensation for each business. But you also have to pay payroll tax for each of these.

To summarize, if you max out your salary over $147,000/year you will get a refund personally for the social security taxes that you overpaid. But the multiple businesses that you own will not get back the 6.2% in taxes for Social Security. Think about it… For every $100,000 that you pay yourself over the $147,000/year, that’s $6,200! 

How to decide if an S Corp is the right decision for your business entity.

First things first, you need to define the purpose of your entity. Typically this is where business owners fail first. Incorrectly defining the purpose of that entity. 

Obviously, the purpose is to produce this or sell this item. But this is not what I’m talking about. We know the business purpose, so to speak. But what is the purpose of this entity for YOU? What is the end goal of this entity?

Are you looking to grow and sell? There are much more favorable IRS codes and regulations for companies that are looking to exit the business in the future. But S corps are not one of them. These IRS codes and regulations encourage startups to grow and sell their business. And that sale could even be tax-free to you. But of course, there are certain criteria and qualifications that you need to meet. And we strongly advise getting a tax planner on your side to walk you through this process.

If you’re operating different businesses, your main operating business should be an S Corporation. This is where you take advantage of medical tax strategies, 401k, and any other tax strategies to maximize your tax savings. There are a lot of different strategies that a tax planner can implement for your business

We want to put as many deductions as possible in the S Corporation. 

The purpose of the S Corporation is to avoid self-employment tax legally by paying yourself a reasonable compensation. Because this is a pass-through entity, it’s going to be your personal income tax earner which is taxed at the highest rate.. And in order to do this, you will want to consult with a tax planner to make sure you are maximizing all the tax deductions that are available to you. 

Should you keep real estate rentals in your S Corporation?

The purpose of the S Corporation is to avoid self-employment tax legally by paying yourself a reasonable compensation.

Income from real estate rentals is not subject to social security and Medicare taxes. So, there is no reason why you should do it as an S Corporation. 

The way to strategize around this would be to put those rentals into a separate LLC or a holding company. You will still be able to pass the income from those rentals to your personal finances. And have a management company take care of those rentals. But it really shouldn’t be in an S corporation. 

The powers for LLCs and their tax advantages.

If you form an LLC and you’re the sole owner, you’re by default a disregarded entity. And as an LLC you can choose how you want to be taxed. You can choose to be taxed as an S Corporation, partnership, or a C Corporation. 

Now you have your S Corp as your main operating business. And now you want to start a few other companies around your main operating business. When you start forming these companies, generally using LLCs will be the best… But always make sure to consult your tax planner.

To Summarize:

  • S corporations are generally the way to go for your main operating business.
  • The big benefit of having an S corp as your main operating business is you pay less in taxes.
  • The biggest problem with having multiple businesses within multiple S corporations is you pay MULTIPLE social security taxes. 
  • To decide if an S corp is the right decision for your business entity you need to define the end goal of your business by consulting a tax planner.
  • Real estate rentals are not subject to social security and Medicare taxes. They are best kept as an LLC or holding company. 
  • LLCs will be the best option when forming other companies around your main operating S corporation. But always consult a tax planner.

How this fits into tax planning.

First and foremost, you need to find a tax planner to help you strategize and come up with a tax plan. always say, if you have a tax preparer, you do not have a tax planner. 

Think of it this way…

The past is in the past and there is nothing else you can do. You can’t go back and undo your entities or undo your salaries. What is done is done and you can’t go back and take advantage of strategies that you missed out on.

This is why it’s important for you to have a tax plan that a tax planner does for you. Sit down with your tax planner. Look at your life, look at your business and look at how you can strategies with your taxes. 

This is extremely important in order to reduce the amount of money you are paying in taxes. 

There are thousands of dollars every year that can be saved when you take advantage of legal, IRS-approved, and court-tested tax strategies. 

If you are interested in tax planning and learning more about how the strategies above can fit into your business, tap here to book a free tax strategy session.

Filed Under: S Corporations, Tax Planning, Tax Strategy Tagged With: s corp, s corporations, tax planning, tax strategy

Primary Sidebar

Search

Archives

  • March 2022
  • February 2022

Categories

  • S Corporations
  • Tax Planning
  • Tax Strategy

Copyright © 2022 · https://www.borismtax.com/blog