Incorporation Tax and Filing Myths – STM

Yesterday, SoftBaugh posted a new article on its blog, “Should I Incorporate?” That article generated some lively feedback, much of which was based on misunderstandings about the nature of business taxes and filing requirements. Today, a new SoftBaugh blog article, Incorporation Tax And Filing Myths, addresses those concerns, and pokes holes in the demand-creation strategy by many CPAs who attempt to scare or confuse people into using their services. In a world where individuals are increasingly using TurboTax and the like for their personal returns, and BigCo has its own auditors on staff, CPAs find themselves fighting over a dwindling small business account pie, and will pull out any trick in the book to keep that business. Unfortunately, some of those scare tactics become self-perpetuating, where people repeat the nightmares to each other until they become real.
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5 Responses to Incorporation Tax and Filing Myths – STM

  1. Unclezip says:

    We use Turbo, for two reasons: First, my default is to tell the IRS to suck it; Second, the Baroness is an accounting specialist for a nearby mid-sized city, and she does not want to deal with that shit when she’s on down time. So we sit down for an hour or two, get it done, and set it aside for a day or so. Then we come back, recheck our work, and either high-five because we were charged too much, or revisit our vacation plans because we owe.

  2. George says:

    The general tone of the article is so dismissive of any disagreement that it irks me to read it. In addition, inconsistencies/inaccuracies or just over generalizations lead me to question the validity of his other statements.

    For instance, he dismisses entirely the argument that C-Corp dividend treatment is a reason for electing Sub-chapter S status by stating that C-Corps can just pay out all profits as wages. This totally ignores the fact that the IRS will

    “examine closely held C corporations to determine whether they have overpaid their shareholder-employees. These corporations are allowed to deduct only “reasonable” compensation paid to shareholder-employees. So, examiners are looking for a disguised dividend, which is corporate profit being treated as compensation. Since a dividend is not deductible, but compensation is, the IRS may treat the portion of the compensation that it considers excessive as a dividend. The result is that the corporation loses its deduction for that amount and is assessed tax, interest, and penalties on the resulting increase in income. – See more at: http://www.journalofaccountancy.com/issues/2013/sep/20137412.html#sthash.41oCNJLY.dpuf

    Then he repeats his statement from the earlier article that a C-Corp has “greater client cachet”

    I’m not sure how he can quantify “client cachet”, but at any rate, the client should not / would not even know whether you are a C-Corp or an S-Corp. To clients, customers, and the outside world a corporation is a corporation. C-Corp and S-Corp is a Tax Election, not different types of corporations. Only the IRS, State department of revenue (and perhaps your banker) will ever know if you are a C-Corp or S-Corp.

    • Tom Baugh says:

      George,

      These articles are for people just getting started. In the early years, the idea of unreasonable compensation is moot. In those years, the owners are probably going to get paid less than their other employees as they get things rolling and build their business.

      As far as S and C go, I have had many clients and vendors ask, and been visibly relieved at the answer before approving projects or credit lines. Perhaps your experiences are different.

      Tom

    • Tom Baugh says:

      George,

      And later in that article you linked, the author says this about C corp compensation:

      If a business owner is underpaid when cash flow is weak, he or she may be entitled to catch-up pay later. For an example, see Choate Construction Co., T.C. Memo 1997-495, in which the Tax Court upheld as reasonable pay of more than $1 million when business improved after the first two years of operations.

      Interestingly, between those two quotes in the same article, is this one regarding S corporations:

      Conversely, S corporations are audited to determine whether they have underpaid their shareholder-employees. These shareholders may have set their own pay levels unreasonably low and simultaneously increased their profit distributions.

      The same flexibility that a C corp can use to get business going could look suspicious for an S corp owner.

      The article also attempts to absolve advising CPAs of any responsibility in the outcome. CPA or no CPA, the owners have to educate themselves about the issues involved and take responsibility for the outcome. I think everyone agrees on this point.

      Cherry-picking an article to make a point doesn’t help anyone make better decisions.

      Tom

      • George says:

        Tom,

        I appreciate you continuing to assist in making my point that the issue is much more complex than Softboughs article makes it appear.

        Although I’m not quite sure why you feel the need to attack me for “cherry picking” as you say; I responded to the specific comment made related to C corp compensation – the additions that you cite are the other side of the argument and simply further my point that he over simplified. If I were “cherry picking” I wouldn’t have linked to the article.

        As to your statement that the article was intended for beginners, that’s what makes it all the more important to point out the over simplistic treatment given.

        And yes, our experience is very different- I’ve never had clients inquire about whether my corporation has filed an s-corp election or not.

        Regardless, I’ll leave the rest of the discussion to your capable hands.

Comments are welcome. Trolls will be banned and then shot.