Turbo Timmy wants small biz to file as C corps

[Zebo]

More anti little guy big business favors from this admin. You need much more expensive and complex accounting and administration to do C Corp vs. pass through. You pay taxes twice. Way to help the little guy!

http://www.bloomberg.com/news/2011-...address-businesses-filing-as-individuals.html

U.S. Treasury Secretary Timothy Geithner told the Senate Finance Committee Feb. 15 that Congress should “revisit” long- standing rules that give businesses a choice of paying taxes as a corporation or through a structure such as a partnership through which they can report business income on individual tax returns.


“It strikes me that Secretary Geithner’s proposal to potentially force businesses to be taxed as corporations runs contrary to the administration’s objectives,” he said. “Most small to mid-sized businesses in the U.S. are structured as pass-through entities in order to avoid double taxation.”

 

[ElFenix]

some of the yahoos at the IRS want people to have imputed income for the rent their house would earn if it were rented out.


though i suppose that could make sense if you could deduct your entire mortgage like a business expense... depreciate your home?

 

[JSt0rm]

yeah fuck that.

 

[Patranus]

While you don't have to pay income taxes twice, C corporations have much more exotic means to shifting capital.

One example is that s corporations only have 1 type of stock. when a payout is made, the payout is made to every shareholder. Even if there is no payout, each shareholder must pay taxes on the gains/losses.

With a C corp, you can have difference class of stock and pay out different dividends. You do not have to pay taxes on what isn't paid out. This allows owners of companies to shift their income distribution between tax year allowing they to more easily leverage losses into tax breaks.

 

[JSt0rm]

While you don't have to pay income taxes twice, C corporations have much more exotic means to shifting capital.

One example is that s corporations only have 1 type of stock. when a payout is made, the payout is made to every shareholder. Even if there is no payout, each shareholder must pay taxes on the gains/losses.

With an S corp, you can have difference class of stock and pay out different dividends. You do not have to pay taxes on what isn't paid out. This allows owners of companies to shift their income distribution between tax year allowing they to more easily leverage losses into tax breaks.

Thats all fine and dandy but I want to spend my days making content sound cool not figuring out tax loopholes.

I write off shit I buy and pay taxes on the money thats left over. I don't really want to do much else with this issue.

 

[Thump553]

Politicians frequently float "trial balloons"-I'll give Geitner the benefit of the doubt that this proposal is a trial balloon to stimulate discussion.

That said, eliminating the Sub-S corporation and barring LLCs and partnerships from passing through their income (and losses) to be taxed at the individual owners' rates would be perhaps the most anti-small business (thus anti-growth) move possible.

PS-Patranus' explanation above is dead wrong. For tax purposes a sub S passes through ALL of its income (or losses) to the owners, and the owners pay taxes upon those amounts, even if the money is retained by the business and not distributed to the owners (a very frequent occurence). I think Patranus is confusing Sub S corporations with C corporations (traditional corp taxation), but even then the explanation is oversimplified.

 

[Patranus]

PS-Patranus' explanation above is dead wrong. For tax purposes a sub S passes through ALL of its income (or losses) to the owners, and the owners pay taxes upon those amounts, even if the money is retained by the business and not distributed to the owners (a very frequent occurence). I think Patranus is confusing Sub S corporations with C corporations (traditional corp taxation), but even then the explanation is oversimplified.

Huh? That is what I said. S Corporates have a lot less flexibility to manage their capital while C Corporations have many more tools to avoid taxes even if they are paying the extra corporate tax.

Edit, you are right, I meant C in the 2nd part.

 

[paperfist]

And tax cheats should spend double time in jail. Oh wait...double standard.

 

[Fern]

-snip-
That said, eliminating the Sub-S corporation and barring LLCs and partnerships from passing through their income (and losses) to be taxed at the individual owners' rates would be perhaps the most anti-small business (thus anti-growth) move possible.

Agreed.

Geitner hasn't remotely demonstrated any competence or understanding of income tax law. IMO, he's the wrong person to be making any recommendations.

Further to that point, I don't see anywhere in that article where he's made any kind of cogent case for getting rid of p'ships or S-corps. (Maybe he did but it wasn't in the article?)

His only point seems to be that some business income is reported on (regular) corp returns, and other business income is reported on individual tax returns. Getting rid of p'ships and s-corps won't change that, we'll still have sole proprietors. I.e., we'll still substantial business income reported only on individuals' tax returns. His solutions doesn't remedy his perceived problem.

Has Geitner even given any consideration to how you'd go about 'unwinding' all the p'ships and s-corps that have been created and operated for so long?

IMO, this just underscores a weakness in this admin - no one in it has a ounce of 'real world' experience.

I'm not worried, this proposal is DOA.

Fern

 

[GuitarDaddy]

The biggest advantage afforded to partnerships and sub-S corps like huge law firms and CPA firms and doctors groups is that most all significant employees are considered partners and thus their incomes are not subject to payroll taxes namely SS and medicare.

I guarantee you that is what they are after, doing away with pass through treatment for sub-S and partnerships, and forcing them to pay social security and medicare including the company match up to the max on all those huge incomes would be a huge boon for addressing the SS and medicare insolvencies.

This would also hit many family partnerships, with the boom in natural gas production in the last few years here in Texas I have been involved in setting up several LLC family partnerships to shield these distributions.

 

[werepossum]

Agreed.

Geitner hasn't remotely demonstrated any competence or understanding of income tax law. IMO, he's the wrong person to be making any recommendations.

Further to that point, I don't see anywhere in that article where he's made any kind of cogent case for getting rid of p'ships or S-corps. (Maybe he did but it wasn't in the article?)

His only point seems to be that some business income is reported on (regular) corp returns, and other business income is reported on individual tax returns. Getting rid of p'ships and s-corps won't change that, we'll still have sole proprietors. I.e., we'll still substantial business income reported only on individuals' tax returns. His solutions doesn't remedy his perceived problem.

Has Geitner even given any consideration to how you'd go about 'unwinding' all the p'ships and s-corps that have been created and operated for so long?

IMO, this just underscores a weakness in this admin - no one in it has a ounce of 'real world' experience.

I'm not worried, this proposal is DOA.

Fern

This man was a horrid choice to run Treasury not only ethically, but also from a matter of pure competence. Sadly, Republicans not only tolerated his choice, he was their preferred candidate too. Dishonest and incompetent, a big bipartisan fail squared.

 

[Fern]

The biggest advantage afforded to partnerships and sub-S corps like huge law firms and CPA firms and doctors groups is that most all significant employees are considered partners and thus their incomes are not subject to payroll taxes namely SS and medicare.

False.

All partnership income is automatically subject to self-employment income (SS and Medicare @ 15.3&#37

S-corps are required by law to pay shareholder actually working them a reasonable salary. I.e., they will pay SS and medicare taxes. However, they won't pay that on dividends. And btw, S-corp dividends are subject to regular tax rates (no special dividend rate). But this does allow some SS tax benefits to an s-corp owner.

I guarantee you that is what they are after, doing away with pass through treatment for sub-S and partnerships, and forcing them to pay social security and medicare including the company match up to the max on all those huge incomes would be a huge boon for addressing the SS and medicare insolvencies.

Again p'ships are irrelevent.

This would also hit many family partnerships, with the boom in natural gas production in the last few years here in Texas I have been involved in setting up several LLC family partnerships to shield these distributions.

Rental income, royalties etc are all exempt from SS and Medicare tax anyway. That wouldn't change by geting rid of pass-through entites.

Geitner doesn't know enough to know what he's doing. We, tax accountants, have been through these games before. Before s-corps, the fight was over how much to classify as wages for owners of regular corps. Wages aren't double taxed (the corp gets a deduction for it) and once you pass the threshhold ($107k) there are no more SS taxes (except for the measly 1.45% now). So (regular) corp owner/employees wanted more as wages.

With s-corps, the fight is over how much s/b 'dividends'. S-corp owner/employees want more taxed as 'dividends'.

Under the former (c-corp), the IRS wants dividends, under the latter (s-corp) they want wages.

So get rid of flow-through entites, or keep them. No matter, we'll all still be plaing one 'game' or the other.
-------------------------------

My 'reading between the lines' is that Geitner wants to raise taxes on businesses while leaving individuals alone. (It's political suicide to raise taxes on people IMO). Businesses and corporations are the big bad boogy man for the Left.

But if he only raises taxes on regular corps, he misses the business income in pass-throughs. I think he wants to capture that too. I won't elaborate, but i think I see the political dance he's heading towards, I don't think it will work.

And he needs to be damn careful. We already have the highest, or second highest, corporate tax. You raise corporate taxes more and your likely to drive down stock values.

I'm getting the impression that he's going to keep at it until he really fvcks things up.

Fern

 

[Thump553]

The biggest advantage afforded to partnerships and sub-S corps like huge law firms and CPA firms and doctors groups is that most all significant employees are considered partners and thus their incomes are not subject to payroll taxes namely SS and medicare.

I guarantee you that is what they are after, doing away with pass through treatment for sub-S and partnerships, and forcing them to pay social security and medicare including the company match up to the max on all those huge incomes would be a huge boon for addressing the SS and medicare insolvencies.

This would also hit many family partnerships, with the boom in natural gas production in the last few years here in Texas I have been involved in setting up several LLC family partnerships to shield these distributions.

I'm not sure where you got the bolded info from, but it is wrong. If it is earned income (like doctors, etc) we actually pay essentially double the SS tax rate (essentially pay both the employees and employers share) and pay the full boat on FICA as well.

I see you are referencing gas and oil royalties, which I imagine is unearned income with different rules-you'd have to bounce that off a CPA or tax professional.

 

[Jhhnn]

I'm not sure where you got the bolded info from, but it is wrong. If it is earned income (like doctors, etc) we actually pay essentially double the SS tax rate (essentially pay both the employees and employers share) and pay the full boat on FICA as well.

And you pay only dividend/ capital gains rates on income disbursed as such, correct?

 

[The-Noid]

I'm not sure where you got the bolded info from, but it is wrong. If it is earned income (like doctors, etc) we actually pay essentially double the SS tax rate (essentially pay both the employees and employers share) and pay the full boat on FICA as well.

I see you are referencing gas and oil royalties, which I imagine is unearned income with different rules-you'd have to bounce that off a CPA or tax professional.

Guitardaddy is correct.

He is discussing pass-thru of S-corp profits, you are discussing salary. He is wrong on partnerships but correct on S-Corps. In the end you are saving roughly $3,000 / $1,000,000 of income on the Medicare side. The SS "self employment" tax rate is higher, however it is done at ~$107K and to make money on the SS side you are on the line for getting an audit assuming you are making a high income.

Congress actually tried to pass a law against this practice last year actually called believe it or not the "American Jobs, Closing Tax Loopholes of 2010 Act."

For a long time, S corporations have been treated as the way around payroll tax obligations. John Edwards is the poster-boy for this problem, in that he created an S corporation that received his services income, then claimed that he was paid a "salary" from the S corporation that should be subject to payroll taxes. He then claimed the rest of his services income was a pass-through of S corporation profits, so not subject to payroll taxation. Clearly, all of the profits were services income attributable to his personal efforts, and all of the pass-through should have been subject to payroll taxation.

http://www.tax.com/taxcom/features.nsf/Articles/4151F3DD6E0FFDFB85257777004E16A2?OpenDocument

The other key to look at and Fern can discuss this is that the easiest way to get audited in this day and age is paying out huge distributions and low salaries. It is a year after year issue that will get your return pulled, but when you have cases like the guy who just went to the Supreme Court paying himself $10,000 and taking over $1MM in distributions there is going to keep being problems.

Any conduit structure has its flaws and most accountants know very little (reading one post of Fern's shows he knows a heck of a lot more than most, sorry Fern didn't read your whole post the mid-quote screwed me up, it made a lot of mine repetitive). If everyone files a c-corp the next tax saving strategy accountants will come up is having the c-corp owner pay themselves a higher salary to avoid double taxation which again breaks IRS rules. The problem isn't conduit structures it is the tax code and how convoluted it is. Besides the increased regulatory filings and higher workload in a lot of cases the c-corp can be a cheaper taxed entity than the s-corp if marginal brackets are used correctly.

Please note the John Edwards example was just that an example, not a solicitation for either political party.

 

[The-Noid]

Snip

Very well written.

I often think Geithner says things to look at what the constructive response will be and if it is very negative adds it to his "don't do" list and it it flies under the radar puts it on the "push forward" list.

 

[The-Noid]

And you pay only dividend/ capital gains rates on income disbursed as such, correct?

S-Corporation ordinary taxable income is passed-thru based on your ownership percentage and you pay tax at your ordinary marginal rate.
S-Corporation received capital gains are passed thru as long-term or short-term gains.
S-Corporation received Qualified Dividends can also be passed thru at the qualified dividends rate.

Thus it is important to keep income type separate for the individual shareholders, however the majority of income generated in the normal course of business is going to be taxed as ordinary income because there are also passive income limitations to being an S-corp (if memory serves me right if more than 25% of your income for 3 consecutive years is passive you are converted to a C-corp).

Please note this should not be considered tax advice, always consult your CPA or tax professional, yada yada yada.

 

[the DRIZZLE]

I'm not sure where you got the bolded info from, but it is wrong. If it is earned income (like doctors, etc) we actually pay essentially double the SS tax rate (essentially pay both the employees and employers share) and pay the full boat on FICA as well.

I see you are referencing gas and oil royalties, which I imagine is unearned income with different rules-you'd have to bounce that off a CPA or tax professional.

He partly correct. They only pay SS on the part they pay themselves as salary. The balance of income is passed through as a distribution. As Fern stated they try to pay themselves as little salary as possible while IRS wants them to pay as much as salary as possible.

 

[werepossum]

Guitardaddy is correct.

He is discussing pass-thru of S-corp profits, you are discussing salary. He is wrong on partnerships but correct on S-Corps. In the end you are saving roughly $3,000 / $1,000,000 of income on the Medicare side. The SS "self employment" tax rate is higher, however it is done at ~$107K and to make money on the SS side you are on the line for getting an audit assuming you are making a high income.

Congress actually tried to pass a law against this practice last year actually called believe it or not the "American Jobs, Closing Tax Loopholes of 2010 Act."

For a long time, S corporations have been treated as the way around payroll tax obligations. John Edwards is the poster-boy for this problem, in that he created an S corporation that received his services income, then claimed that he was paid a "salary" from the S corporation that should be subject to payroll taxes. He then claimed the rest of his services income was a pass-through of S corporation profits, so not subject to payroll taxation. Clearly, all of the profits were services income attributable to his personal efforts, and all of the pass-through should have been subject to payroll taxation.

http://www.tax.com/taxcom/features.nsf/Articles/4151F3DD6E0FFDFB85257777004E16A2?OpenDocument

The other key to look at and Fern can discuss this is that the easiest way to get audited in this day and age is paying out huge distributions and low salaries. It is a year after year issue that will get your return pulled, but when you have cases like the guy who just went to the Supreme Court paying himself $10,000 and taking over $1MM in distributions there is going to keep being problems.

Any conduit structure has its flaws and most accountants know very little (reading one post of Fern's shows he knows a heck of a lot more than most, sorry Fern didn't read your whole post the mid-quote screwed me up, it made a lot of mine repetitive). If everyone files a c-corp the next tax saving strategy accountants will come up is having the c-corp owner pay themselves a higher salary to avoid double taxation which again breaks IRS rules. The problem isn't conduit structures it is the tax code and how convoluted it is. Besides the increased regulatory filings and higher workload in a lot of cases the c-corp can be a cheaper taxed entity than the s-corp if marginal brackets are used correctly.

Please note the John Edwards example was just that an example, not a solicitation for either political party.

This also shows the problem with our massive and extremely complicated tax system. If you are connected and relatively powerful like Edwards (of either or no party), then you can do things that if done by others would be punished with heavy fines.

 

[GuitarDaddy]

Guitardaddy is correct.

He is discussing pass-thru of S-corp profits, you are discussing salary. He is wrong on partnerships but correct on S-Corps. In the end you are saving roughly $3,000 / $1,000,000 of income on the Medicare side. The SS "self employment" tax rate is higher, however it is done at ~$107K and to make money on the SS side you are on the line for getting an audit assuming you are making a high income.

Congress actually tried to pass a law against this practice last year actually called believe it or not the "American Jobs, Closing Tax Loopholes of 2010 Act."

For a long time, S corporations have been treated as the way around payroll tax obligations. John Edwards is the poster-boy for this problem, in that he created an S corporation that received his services income, then claimed that he was paid a "salary" from the S corporation that should be subject to payroll taxes. He then claimed the rest of his services income was a pass-through of S corporation profits, so not subject to payroll taxation. Clearly, all of the profits were services income attributable to his personal efforts, and all of the pass-through should have been subject to payroll taxation.

http://www.tax.com/taxcom/features.nsf/Articles/4151F3DD6E0FFDFB85257777004E16A2?OpenDocument

The other key to look at and Fern can discuss this is that the easiest way to get audited in this day and age is paying out huge distributions and low salaries. It is a year after year issue that will get your return pulled, but when you have cases like the guy who just went to the Supreme Court paying himself $10,000 and taking over $1MM in distributions there is going to keep being problems.

Any conduit structure has its flaws and most accountants know very little (reading one post of Fern's shows he knows a heck of a lot more than most, sorry Fern didn't read your whole post the mid-quote screwed me up, it made a lot of mine repetitive). If everyone files a c-corp the next tax saving strategy accountants will come up is having the c-corp owner pay themselves a higher salary to avoid double taxation which again breaks IRS rules. The problem isn't conduit structures it is the tax code and how convoluted it is. Besides the increased regulatory filings and higher workload in a lot of cases the c-corp can be a cheaper taxed entity than the s-corp if marginal brackets are used correctly.

Please note the John Edwards example was just that an example, not a solicitation for either political party.

Thanks for the correction! I was absolutely wrong and flat mispoke about lack of schedule SE taxes for partnerships as Fern and Thump pointed out, but you got the gist of my misguided argument.

I would also point out that even in the case of Lawyers and Doctors paid through partnership distributions that YES they do pay the 15.3% SE tax, but only on thier NET income after write offs as opposed to W-2 employees paying based on gross income. Therefore the govt will recieve more payroll taxes revenues from a corporate employee recieving $100k in W2 payroll than they will recieve from a partner recieving $100k in K1 revenue through a partnership as thier net income after deductions will be less than $100k.

 

[Texashiker]

This thread is further proof that the entire tax code needs to be overhauled.

 

[The-Noid]

Thanks for the correction! I was absolutely wrong and flat mispoke about lack of schedule SE taxes for partnerships as Fern and Thump pointed out, but you got the gist of my misguided argument.

I would also point out that even in the case of Lawyers and Doctors paid through partnership distributions that YES they do pay the 15.3% SE tax, but only on thier NET income after write offs as opposed to W-2 employees paying based on gross income. Therefore the govt will recieve more payroll taxes revenues from a corporate employee recieving $100k in W2 payroll than they will recieve from a partner recieving $100k in K1 revenue through a partnership as thier net income after deductions will be less than $100k.

In the situation above, the IRS will receive the same amount from both employees, however the tax burden will be on different payers.

The K-1 is after deductions taken on the partnership return unless they had another business that would have either K-1 losses or another business generating schedule c loss (there are some depreciation/amortization issues that come in but generally the vast majority of deductions are on the form 1065 not the individual return) the ordinary income of the partnership would pass through in designated fashion to the partner and be subject to self employment tax.

In the corporate situation the employee would be liable for his end of withholding and the company would match both SS and Medicare.

In the end the IRS receives the same. The only way the partnership K-1 employee would pay less is if they had another losing business that either provided a K-1 loss, they had schedule C losses from another business or had some depreciation/amortization offsets that passed-thru.