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What to do after you get your LLC or INC?

LLC INC

Congratulations on setting up your new LLC or Incorporation (Inc.)! Now that your business entity is officially active, it’s time to take a few crucial steps to ensure everything runs smoothly and efficiently.

These steps will help you establish a strong foundation, maintain compliance, and set your business up for success. Here are 6 essential steps to consider now that your LLC or Inc. entity is active:

  1. 1️⃣ Create articles and a bank resolution document for your new business checking account.
  2. 2️⃣ Set up a business checking account under the new entity, using its EIN number.
  3. 3️⃣ Complete an IRS W9 form with your new entity info. Give this to your customer(s) so they pay you using the EIN number and not your SSN number.
  4. 4️⃣ If you plan to purchase and resell materials/products, you’ll need to apply for a sales tax permit with your state (TX link here).
  5. 5️⃣ Be prepared for potential spam. What you get from the State of Texas is legit; read that. Anything else may be trying to convince you to spend money. Avoid those emails.
  6. 6️⃣ If you have a partner, we highly recommend contacting a business attorney and getting an Operating Agreement everyone agrees to with notarized signatures, so all partners are financially protected. We have witnessed too many partnership disputes over the last decade that all started in good spirits and ended in turmoil once the money started flowing in. (Full Disclosure: We receive no financial compensation for this legal referral)

How Can We Help with Your LLC, INC, and Business?

Once your operations are up and running, let us know. We offer ongoing monthly services customized to your needs, including accounting, payroll, W2 reasonable salary, 401K/IRA contribution planning, business and personal taxes, virtual controller services, budget and cash-flow forecasting, fractional CFO services, and unlimited CPA resources.

Our Basic 1-Owner CPA Monthly Services Agreement Includes:

  • ✅ Helping set up and run payroll;
  • ✅ An onboarding call to learn more about your goals;
  • ✅ Assistance with contributing to and maximizing retirement savings;
  • ✅ Conducting an S Corp Salary Test to determine your “reasonable” salary required by the IRS;
  • ✅ Filing 1040 estimated tax payments;
  • ✅ Business Tax Returns – IRS and State(s): 1120C, 1120S, and 1065;
  • ✅ Personal Tax Returns – IRS 1040, and state(s) if applicable – including a Schedule A, B, C, D, and E (for rentals);
  • ✅ Audit assistance protection with your personal tax filings;
  • ✅ Ongoing CPA resource for any questions you have throughout the year.

Ready to Optimize Your Business Finances?

Based in Austin, TX, we serve businesses with year-round accounting, tax strategy, and wealth-building services. We create customized monthly packages to help grow your business and assist with individual taxes too.

Contact us today to learn how we can help you minimize taxes and maximize your business potential. Let’s make your financial goals a reality!

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How to reduce S-Corp Tax as an S Corporation Shareholder in 2024

As an S Corporation, one of the best ways to minimize taxes is by compensating shareholders fairly. This article reviews setting appropriate compensation levels for your S Corp in 2024.

S Corporation Compensation 💰

S Corporation compensation requirements are often misunderstood and misused by owner-shareholders.

An S Corporation is a type of business structure where the business doesn’t pay income tax at the corporate level. Instead, it passes income, gains, losses, and deductions to the shareholders for inclusion on their income tax returns. If there are gains, these distributions are seen as a return on investment and are not subject to self-employment taxes.

how to reduce s corp tax

Reasonable Compensation in an S Corp 💸

If shareholders also work in the business, they should take reasonable compensation for their services as wages. Wages are subject to FICA (Social Security and Medicare) and other payroll taxes. Some owner-shareholders make the mistake of not paying themselves reasonable compensation, either out of unfamiliarity with the rules or to avoid payroll taxes.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee for federal employment tax purposes. S corporations should not try to avoid paying employment taxes by treating compensation as cash distributions, personal expenses, or loans rather than wages.

If the S Corporation doesn’t pay the working shareholders reasonable compensation, the IRS can treat a portion of the S Corporation’s distributions as wages and impose Social Security taxes on those deemed wages.

Determining Reasonable Compensation in an S Corporation

There’s no specific method for determining what constitutes reasonable compensation—it’s based on facts and circumstances. Generally, it’s an amount that unrelated employers would pay for similar services under like circumstances and considering the cost of living in the area where the business is located.

Here are some factors considered when determining reasonable compensation:

  • ✅ Training and experience
  • ✅ Duties and responsibilities
  • ✅ Time and effort devoted to the business
  • ✅ Dividend history
  • ✅ Payments to non-shareholder employees
  • ✅ Timing and manner of paying bonuses to key people
  • ✅ Comparable businesses’ pay for similar services
  • ✅ Compensation agreements
  • ✅ Formulas used to determine compensation

The problem is that it’s easy for the IRS to list these contributing factors and leave it to the corporation to quantify them into a reasonable salary. However, they can still challenge the amount if an auditor decides the compensation is unreasonable.

The IRS has a long history of examining S Corporation tax returns to ensure reasonable compensation is being paid, especially if no compensation is shown as paid to employee-shareholders.

Reasonable Compensation in the Spotlight 💵

With recent tax reforms, reasonable compensation is crucial due to the new deduction for 20% of pass-through income. This new Sec. 199A deduction is equal to 20% of qualified business income (QBI) and will be included on the shareholder’s income tax return. The QBI for the shareholder of an S Corporation is the amount of net income passed through to the shareholder and designated as QBI on the K-1. However, the shareholder may not include the reasonable compensation (wages) they were paid as QBI. Thus, wages paid to shareholders reduce the QBI because the S Corporation deducts the wages as a business expense, reducing the corporation’s net income and QBI. But wages cannot be arbitrarily adjusted to maximize the Sec. 199A deduction.

IRC Sec. 199A Deduction

Here are some details about how the 199A deduction works and the impact of reasonable compensation wages on the Sec. 199A deduction:

  • 💡 The S Corporation’s employee-shareholders’ wages are NOT included in QBI when computing the 199A deduction. Thus, the larger the wages, the smaller the K-1 flow-through income (QBI) and, therefore, the smaller the 199A deduction, which is 20% of QBI. An S Corporation may pay the shareholder a smaller salary to maximize the flow-through income and, as a result, the 199A deduction.
  • 💡If married taxpayers filing a joint return have taxable income exceeding $315,000 ($157,500 for other filing statuses), the 199A deduction begins to be subject to a wage limitation. Once the taxable income for married taxpayers filing a joint return exceeds $415,000 ($207,500 for other filing statuses), the 199A deduction becomes the lesser of 20% of the QBI or the wage limitation. For these high-income taxpayers, an S Corporation may pay shareholders less wage income for them to benefit from the Sec. 199A deduction.
  • 💡If an S Corporation is a specified service trade or business, the Sec. 199A deduction phases out for married taxpayers filing a joint return with taxable income between \$315,000 and \$415,000 (between \$157,500 and \$207,500 for other filing statuses). Although the wage limitation is used in computing the phase-out, once the taxpayer’s taxable income exceeds \$415,000 (\$207,500 for other filing statuses), the taxpayer will receive no benefit from the wage limitation and would again want to minimize their reasonable compensation to reduce FICA taxes. Specified service trades or businesses (SSTBs) include those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, and financial services.

Determining Reasonable Compensation 📑

Taxpayers cannot simply pick and choose a reasonable level of compensation to minimize taxes or maximize deductions. Therein lies a trap for those who do not consider the factors related to reasonable compensation. Commercial firms have the data necessary to determine reasonable compensation and specialize in doing so. These firms can be found by searching the Internet for “reasonable compensation.” Even the IRS has employed these firms to provide reasonable compensation data in tax court cases.

Need Help Setting Reasonable Compensation in Your S Corp?

If you need additional information related to reasonable compensation, don’t hesitate to call us. We’re here to ensure your S Corporation stays compliant and tax-efficient. Contact us today to discuss how we can help your business thrive in 2024 and beyond.

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Guide to S Corp taxes for Small Business Owners: S Corporation FAQs and Tips

s corp tax

While we see a number of questions related to S Corp tax saving strategies, the top question we get from small business owners regarding taxes is:

“Am I paying too much in taxes?”

Are you a small business owner and feel like you’re paying too much in taxes? There’s a very good chance you might be.

We see it in small businesses like yours all the time.

Come tax season, your CPA tells you your bookkeeper missed several chances to save you money. But it’s too late. Your taxes are due, and the IRS is calling. Maybe next year. But you can avoid scenarios like this by being proactive and planning ahead.

Other Common Questions About S Corp Tax Saving Strategies:

  • ❓What can I write off on my S Corp taxes?
  • ❓How do you get the most out of an S Corp?
  • ❓Is it better to be taxed as an S Corp?
  • ❓How do I prepare my S Corporation Tax Return?
  • ❓What are S Corporations?
  • ❓What are the top tax saving strategies for S Corps?

The S Corporation Election

What is an S Corporation and how do you make an S Corp election for your business?

Reducing Your Tax Bill

There are a number of different tax reduction strategies for businesses and business owners. 

Who Is an Employee?

An officer of a corporation is generally considered an employee. Being a shareholder doesn’t change the requirement that any payments to an officer must be treated as wages. Courts have consistently ruled that S corporation shareholders who provide more than minor services to their corporation are employees whose compensation is subject to federal taxes. There’s an exception for officers who do not perform or perform only minor services.

Starting a New Business

Are you starting a new business? If you are an entrepreneur and you are just launching your new business venture, here are some things to consider to make sure that you are set up for success.

Setting Up a LLC

A Limited Liability Company (LLC) is one form of business legal structure. Find out if it’s the right one for you.

Payroll and Compensation

If you have employees, or are even considering paying yourself as a business owner, there are a number of tax implications to consider to minimize your overall taxes. 

Accounting for Small Businesses

There are a number of accounting options for small businesses. Explore whether integrated accounting teams, and/or cloud accounting are a good fit for your business needs.

Maximize your tax savings now!

Don’t let another year slip by without maximizing your tax savings. As a small business owner, it’s crucial to stay ahead of the game. Schedule a consultation with our expert CPAs today and let us help you optimize your S Corp tax strategy. Reach out now and ensure your business thrives in 2024!

Call us today!

Reasonable Compensation and S Corps in 2024

what do you need to know about reasonable compensation?

Unlike a C corporation, which pays taxes on its income, an S corporation distributes its income, losses, deductions, and credits to shareholders’ individual tax returns on a pro-rata basis. These distributions aren’t subject to self-employment (Social Security and Medicare) taxes.

The Need for Reasonable Compensation

Many S corporations overlook the requirement that each shareholder-employee must take reasonable compensation as W-2 wages for services performed. These wages are subject to Social Security and Medicare taxes (split between the corporation and the employee) and the Federal Unemployment Tax (and possibly state unemployment taxes).

Distinguishing Roles: Shareholder, Officer, Employee

The Internal Revenue Code states that an officer of an S corporation is considered an employee for Federal Unemployment Tax purposes. S corporations should not attempt to avoid this tax by treating officers’ compensation as distributions rather than wages.

Unreasonable Salaries and Employment Taxes

This issue has persisted for decades. In 1974, the IRS ruled that if a shareholder-employee doesn’t take a salary, or if it’s unreasonable, an auditor can reclassify distributions to account for reasonable compensation, assessing the related employment taxes and penalties. This includes the employee’s 6.2% Social Security and 1.45% Medicare payroll taxes, the S corporation’s matching amounts, and the Federal Unemployment Tax.

Who Is an Employee?

An officer of a corporation is generally considered an employee. Being a shareholder doesn’t change the requirement that any payments to an officer must be treated as wages. Courts have consistently ruled that S corporation shareholders who provide more than minor services to their corporation are employees whose compensation is subject to federal taxes. There’s an exception for officers who do not perform or perform only minor services.

What’s a Reasonable Salary?

According to Form 1120S instructions: “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” There are no specific guidelines in the tax code for reasonable compensation. Courts base their decisions on the facts and circumstances of each case.

IRS Factors for Determining Reasonable Compensation

Factors considered by courts and the IRS when determining reasonable compensation include:

  • 👉 The officer’s training and experience
  • 👉 The officer’s duties and responsibilities
  • 👉 The time and effort devoted to the business
  • 👉 The corporation’s dividend history
  • 👉 Payments to non-shareholder employees
  • 👉 Timing and manner of bonuses paid to key people
  • 👉 Payments by comparable businesses for similar services
  • 👉 The corporation’s compensation agreements
  • 👉 Compensation formulas used by similar corporations

IRS Oversight and Challenges

The IRS often examines S corporations’ tax returns to ensure reasonable compensation is paid, especially when no compensation is paid to employee-stockholders.

The Pitfalls of Maximizing Deductions

Taxpayers can’t choose a compensation level to minimize taxes or maximize deductions without considering all factors related to reasonable compensation. Gathering the necessary data to support this can be complex and time-consuming. Some commercial firms have the resources to apply these factors properly, providing backup in case of an IRS challenge.

Get Expert Help with Employee Compensation for Your S Corp

Determining shareholder compensation can be tricky for S corporations. If you have questions about reasonable compensation for S corporation shareholders or its impact on your specific tax situation, call the experts at Insogna CPA. We’re here to help you navigate these complexities and ensure compliance.

If you need personalized advice or have specific questions, don’t hesitate to reach out to Insogna CPA. Let’s make sure your S corporation is in top shape for 2024!

Call us today!

Why is loan documentation for business loans important?

loan documentation

In the world of business, transactions can get complicated, and it’s essential to keep everything above board to avoid trouble with the IRS.

Today, we’re diving into a vital aspect of corporate finances: loan documentations within your corporation.

The Loan Dilemma: C vs. S Corporations

Whether you’re lending money to your corporation or receiving loans from it, proper documentation is key. Failure to do so can lead to unexpected tax consequences that no one wants to deal with. Let’s break down the potential pitfalls:

💡 S Corporation Woes: If you’re operating as an S corporation (scorp), any loan that isn’t correctly documented can result in taxable wages for you. Ouch!

💡 C Corporation Conundrum: For those of you in C corporations (ccorp), an undocumented loan can lead to taxable dividends being issued to the shareholder. Not a pleasant surprise.

The Teymourian Story: A Cautionary Tale ⚠️

Let me share the story of Nariman Teymourian, who went through a nerve-wracking IRS audit. At the end of it all, the IRS claimed he owed over \$600,000 in taxes and penalties, mainly due to advances he received from his majority-controlled corporation.

The good news? Mr. Teymourian triumphed in court and paid zero additional taxes. The bad news? He had to go to court in the first place. Let’s learn from his experience and avoid similar pitfalls.

The Importance of Good Record-Keeping

When you operate as a C or S corporation, meticulous paperwork is your best friend. The IRS will closely scrutinize your advance accounts and make one of two determinations:

👉 Advances as Loans: The advances are recognized as loans from the corporation to you.

👉 Advances as Dividends (C-Corp only): The advances are considered disguised dividends, subject to taxation.

Clearly, there’s a massive difference between a loan and a taxable dividend. To ensure you’re on the right side of the IRS, let’s dive into a checklist inspired by Mr. Teymourian’s story.

Your Loan Documentation To-Do List

To avoid tax headaches, make sure you can answer “yes” to these seven crucial questions:

  1. 1️⃣ Promissory Note: Did you sign a promissory note or another document promising to repay the money to the corporation?
  2. 2️⃣ Interest Payments: Did you pay interest on the advances?
  3. 3️⃣Scheduled Payments: Did you make payments on a fixed schedule, such as monthly or quarterly?
  4. 4️⃣ Collateral: Did you provide collateral to secure your repayment?
  5. 5️⃣ Repayment: Did you physically repay the loan?
  6. 6️⃣ Credit Checks: Did the corporation assess your ability to repay by checking credit reports and statements of net worth?
  7. 7️⃣ Loan Behavior: Did both you and the corporation treat the advances as loans in your actions and paperwork?

Remember, you may be asked these questions years down the line, so ensuring “yes” answers from the start is crucial. The more “yes” answers you have, the safer your financial position.

🛡️Protect Your Business and Your Wallet

Operating as a C or S Corporation comes with numerous benefits, but it also requires diligence when it comes to documentation. Don’t wait until the IRS comes knocking at your door. Follow these guidelines and protect your business from unnecessary tax burdens.

If you have questions or need assistance with your corporation’s financial documentation, our experienced team at Insogna CPA is here to help.

Let’s ensure your business stays in the clear when it comes to loans and taxes. Don’t wait until it’s too late – safeguard your financial future now!

Call us today!

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