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Need Some Deductions for 2011?

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10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Business Structures

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Advantages of an S-corporation

Personal Liability Protection

Shareholders receive personal liability protection the

This is true whether your business was originally organized as a regular C-corporation or limited liability company (LLC) then elected to be taxed as an S-corporation.

Electing S-corporation status is simply a tax election. It allows shareholders to be taxed on S-corporation net income at the individual level on Form 1040.

FICA Taxes Can Be Reduced:

As an S-corporation shareholder/employee you must have social security and Medicare taxes withheld from your salary just like any regular employee.

The S-corporation must then match the amount of social security and Medicare taxes withheld from your gross pay.

You can save money on FICA taxes by paying yourself the lowest reasonable salary.

If you need additional income, you can take it out of the S-corporation as a distribution (just cut a check payable to yourself and document the disbursement as a distribution of profits).

Keep in mind, unlike distributions to shareholders by a C-corporation from its retained earnings, which are dividends, distribution to shareholders of an S-corporation are not considered dividends.

S-corporation net income, whether or not actually distributed, is included in each S-corporation shareholder's gross income, according to his/her proportionate share, and taxed at ordinary income tax rate.

CAUTION!

The IRS is very aware of this practice of S-corporation shareholder/employees paying themselves lower wages to reduce social security and Medicare taxes.

Therefore, you MUST MAKE SURE that the wages you are paid are REASONABLE for the work you are doing as compared to the average wage paid for the same work in your industry. And document it!

Double Taxation Avoided:

The pass-through feature of an S-Corporation is what makes it possible to avoid double taxation of income.

Income is taxed directly to shareholders, even if not distributed. In contrast, C-Corporation income is taxed to the the corporation first, then, to shareholders, but only if it is distributed to them as dividends.

Losses are Deductible:

S-Corporation shareholders get to deduct losses against other income reported on their individual income tax returns. For a new business, where losses are common the first year or two, this can prove to be a real tax saver.

The amount of loss you may deduct is limited to your stock basis plus your loan basis. Only loans made by you to the corporation for which you are personally liable count. Loans made by others that you guarantee don't count.

In contrast, C-Corporation shareholders may not deduct corporate losses (net operating losses and net capital losses).

The corporation deducts:

Disadvantages of an S-corporation

Cost:

Setting up a corporation may cost hundreds or even thousands of dollars in legal, accounting, and filing fees.

Then, there are the ongoing legal and accounting fees to comply with state corporation laws and federal and state tax laws.

However, the benefit of limited liability protection may justify the cost.

Next:

S-corporations: S-corporation Capital Accounts

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