This tax season again brought an active conversation regarding business structures and taxes. This is a good time to think about the issue; to ask the right questions.

The current hot topic for small businesses seems to be the “S Corporation.” The question I am hearing is: “How do I convert my small business to an “S Corporation”?

I think a better question is:  “Should I convert my small business to an S Corporation?”

The answer to that question will give you the answer to: “Will my conversion to an S Corp put more after tax money in my pocket?”

There can certainly be advantages for certain businesses but S Corp election is not a “one size fits all” solution. S Corps come with disadvantages as well and you should think them through before changing. Some of them are:

1. Extra Tax Return and Legal Fees ….corporations need professionals: tax professionals, bookkeepers, lawyers
2. Extra Paperwork….The S Corporation entails extra structure, formalities, and compliance obligations for the solo entrepreneur with a “payroll of one.”  You need to set up a board of directors, file annual reports and other business filings, hold shareholder’s meetings, keep records of your meeting minutes, and generally operate at a higher level of regulatory compliance than your business might need or want to deal with.
3. The shareholder must receive reasonable compensation. If you try to cheat the system by paying yourself a lower salary and higher distributions you might claim a tax advantage for the year, but the IRS takes notice of such red flags. If the IRS  reclassifies your distributions as wages you’ll be back to paying the higher employment tax and you will be on the IRS’s radar screen for some time to come.
4. Transfer of Assets: the assets are owned by the S Corporation. They are not yours. Taking them from the S Corp could easily trigger a taxable action.
5. In case of your death, proving the fair market value could be difficult, expensive, and complicated for your heirs.
6. Some benefits that shareholder/employees receive can be written off as business expenses. Nevertheless, if such an employee owns 2% or more shares, the benefits like health and life insurance are deemed taxable income and additional bookkeeping/accounting is required.

The tax savings and solidity of the S-Corp also come with a price and you should know what it will be for your business. Don’t rush into a new and more complex business structure on vague promises of lower taxes. It is not that simple! The more information you have,  the better!!

We understand that you work hard and value your time.  At MJW EA & Company, we strive to match your efforts with resources and information that simplifies the understanding of Tax laws, Rulings, and Regulations that could affect your finances.

Following are helpful hints regarding end of year reporting requirements and closing the year for BUSINESS FILERS (regardless of your tax status – Corp; Partnership; LLC; Sole-Proprietor):

• You are required to file 1099′s for all individuals (including partnerships and LLC’s) that you paid more than $600.00 to during the course of the year for services performed.  This includes landlords, repairman, maintenance people, interior designers, accountants, and lawyers – to name a few.  We can assist you with the 1099 filing to the state and IRS if you are not prepared to do these in house.  These are due to the individuals by January 31, 2013.  Transmittals to the state and IRS are due by February 28, 2013.
• You are required to distribute all W-2′s to your employees by January 31, 2013.
• Quarterly payroll reports are due by January 31, 2013.
• Annual payroll reports are due by February 28, 2013.
• Verify all employees’ personal information.  The SSA is charging a $50.00 penalty for all W-2′s that are issued with incorrect name (as registered with the SSA), address, and social security number.
• You are required to file your annual or quarterly sales tax report by January 31, 2013.
• Verify that the sales reflected in your sales tax reports for the year tie out to the sales you have recorded for your income tax return.
• Calculate any “Use Tax” due for taxable items purchased out of state to be included and paid with your sales tax report.
• If you carry an inventory perform a year end physical inventory and cost it out.
• If you are a cash basis taxpayer:  Pay all 2012 expenses prior to December 31, 2012 to benefit from the expense this year.
• This is a good time to reconcile all of your fixed assets with what is reported on your Personal Property Declaration and your Fixed Asset Schedule for tax purposes.  If you have disposed of any of the equipment or furniture that you have previously depreciated there may be some income tax implications.  Review that information and make available for your tax preparation.
• Business Mileage Clarification:  If you do not take an office-in-home deduction because you do not use the space exclusively and regularly for business, you are still eligible for business miles when you leave your home IF your home office qualifies as your principal place of business.  The IRS is stressing compliance on mileage logs – substantiation is extremely important with the IRS moving towards a higher audit rate.
• For 2012 Form 1099K, Merchant Card and Third Party Payments, will be sent to you for all of your credit card sales.  This information is required to be separately reported on your 2012 tax return.

We will do our best to keep you updated on 2012 Tax Law Changes as we hear about them.

If we can be of any assistance during these processes – or if you have other year-end questions, don’t hesitate to contact us!

Here’s to a peaceful new year!