Why Your Business Shouldn’t Be a C Corporation

With 2018 tax reform, we have received more and more questions- why shouldn’t I switch to a Corporation?  In most cases the answer is simple – it’s not many situations where double taxation is advantageous.

C Corp basics

C Corps have many unique properties. First, they are the most complex form of business. They require the most effort to set up and maintain each year. Because C Corps have been around so long, the laws regarding their operations and liability protection are well established. C Corps are owned by shareholders who, in most cases, cannot be held liable for the actions of the corporation.

C Corp taxation

When it comes to taxes, the C Corp pays income tax on its income. C Corps have much more generous rules regarding employee benefits for shareholders. Many times, officers of C Corps can have benefit packages that significantly outweigh their actual salary. Many of these benefits are either limited or not available to owners of other business types. C Corps do have some drawbacks though. While figuring its tax amount, it does not get to deduct the amounts paid to shareholder as dividends. As an example, if a C Corp has $100,000 in operating profit and then pays out $60,000 in dividends to its shareholders, it is taxed on the full $100,000. That means that corps must be careful to not pay more dividends than they afford since they need to maintain enough cash to stay afloat and cover taxes.

Here is where the pain hits home though for owners of small C Corps. That $60,000 in dividends gets added to their personal tax returns as additional income. So their personal taxable income jumps up along with their tax bill. The term double taxation comes from the fact that both the C Corp and the individuals pay income tax on the dividend income.

Another major drawback to a C Corp happens in years where the business generates a loss. Let’s say you run a C Corp and just had a rough year. You paid yourself just enough of a salary to live on ($50,000), but overall the C Corp lost $200,000. With most business types, you would be able to net those two numbers together to produce a net loss of $150,000 when calculating your personal taxable income. But with a C Corp, the loss gets stuck inside of the C Corp. That means you will still pay tax on your $50,000 salary, but the C Corp’s $200,000 loss does not help you at all. Having a C Corp in a couple of down years can cost tens of thousands of dollars in extra tax.

Who should have a C Corp?

If a C Corp’s income is subject to double taxation, who would ever set one up? The answer is almost always large businesses. It is quite rare that a C Corp is the right answer for a small business or an independent professional. There are cases where it makes sense for a small business, but those are few and far between. Large businesses rely on the C Corp’s structure and ability to sell stock to be able to raise funds. They rely on its proven liability history and its ability to provide benefits to officers. If your net income is over or approaching $1 million per year, 2018’s corporate income tax rate of a flat 21% is low enough that you may want to have a competent tax advisor prepare a comparison of tax structures for you to see if switching to a C Corp makes financial sense.

For everyone else

Unless you have a large company or a specific need for a C Corp, there are many other options that can fit your needs much better (and much cheaper!). LLCs are an incredibly flexible option that allow us to make tweaks to your tax plan as needed. Paired with the proper tax election, an LLC can meet the needs of many small businesses.

How can we help

Selecting the right business entity and taking advantage of every legal tax strategy provides you with a competitive edge in the marketplace. If you aren’t 100% sure you have the right structure in place, or if you aren’t sure you are taking advantage of your structure to the fullest, please contact us. We have competent professionals who can guide you through the process and make sure you aren’t missing opportunities that your competitors are taking.

A Whole New Ballgame:
Tax Reform Effects on Individuals and Businesses

Click Here to download a pdf version of this 2018 Tax Reform Guide!

For most taxpayers, the sweeping changes to federal tax laws enacted by Congress at the end of 2017 will be most apparent when it comes time to report 2018 income. But smart taxpayers will make an effort to understand these changes in advance, since many of the decisions we make are based upon past tax consequences that no longer apply. Now that we can no longer rely on a lot of those assumptions, it’s a good time to dive in for a closer look at the new tax laws and think about the wisest course to plan for your financial journeys in 2018 and beyond. You’ll also pick up some strategic tax planning tips that can reduce future taxes.

This guide is intended to give an overview of the new tax reform law, organized to highlight those changes likely to have the most significant impacts on the individual and business activities of our clients. It would be impossible (not to mention tedious) to give a comprehensive accounting of all the changes large and small – the final language in the reconciled conference report was 1,097 pages. It will take several years, if not a decade, before regulations are firmed up as tax court rulings provide interpretive guidance to all the changes to the tax code. However, some things we do know for sure. Many of the rates and formulas have changed to a significant degree so that old assumptions are now playing into a whole new ballgame, creating multiple traps for the unwary. Here is an overview of the most important changes to the tax code that you’ll need to understand right now.

Tax Reform Effects For Individual Taxpayers

1. Changes to Income Tax Brackets

There are still seven federal income tax brackets — but at slightly lower rates and adjusted income ranges. Here’s a peek at two of the most common filing categories, comparing old vs. new tax brackets:

Rates for Single Taxpayers

Rates for Married Filing Jointly

Source: Skye Gould/Business Insider

New Brackets & Tax Rates For Other Filing Status

2. Increased Standard Deduction, Fewer Itemized Deductions

One of the goals of tax reform was simplification for the individual taxpayer based on this proposition: increase standard deductions to reduce the number of taxpayers itemizing deductions.

High income earners with qualifying deductions may still find it advantageous to itemize, even though limits have been placed on many of the items they’ve fully deducted in the past.

State and local taxes limitation: The state and local income tax deduction will be limited to $10,000 annually for most filing statuses. (Married Filing Separately is $5,000 each.) This will hurt anyone living in areas with high state and local tax rates, and higher income earners ($200,000+) no matter where they live.

Mortgage interest: Mortgages closed after 12/15/17 (or 4/1/18 if a written contract existed prior to 12/15/17) will have mortgage interest limited on mortgages greater than $750,000. Existing mortgages will be treated as they were, with a $1,000,000 threshold for interest limits. Debt that is refinanced for loans exisiting prior to 12/15/17 is grandfathered in, with some qualifications.

Home equity loan interest: Starting with 2018 income tax returns, interest on home equity lines of credit is no longer deductible. If you had planned on using funds from a HELOC for seeding other types of investments, you will need to factor in that higher debt cost. Second mortgages used for substantial home improvements still qualify for the mortgage interest deduction.

2% limitation: The 2% of Adjusted Gross Income (AGI) limitation on miscellaneous itemized deductions (tax prep fees, investment management fees, unreimbursed work expenses) has been eliminated.

Casualty and theft losses: This deduction has been eliminated, unless the loss takes place in a federally declared disaster area or if the loss is used to offset a casualty gain. This is a good time to check your casualty insurance policies to make sure all your real and personal property is adequately covered, since you can no longer use such losses to reduce taxes.

Moving expenses: Moving expenses are no longer tax deductible, unless the taxpayer is in the armed forces and the move is due to a permanent station change.

Charitable donations: These are still deductible, but you will only receive the tax benefit if you itemize. If you can itemize then it makes sense to itemize and claim your charitable contributions.

Athletic Ticket Donations: The 80% deduction that could be taken for charitable contributions which provide seating priority benefits is no longer available.

The combined effect of all the above means that fewer people will itemize their deductions. To that extent, one major tax simplification goal will have been achieved.

3. No More Personal Exemptions

Whereas before you could deduct personal exemptions of $4,050 for yourself and everyone in your household (subject to phaseouts), these personal exemptions are now eliminated. This elimination is intended to be offset by the increase in standard deduction. Eliminating personal exemptions will have the most significant impact on families with more children, especially those with dependent children over the age of 17 (such as college students).

4. Other Changes Affecting Taxable Personal Income

Child Tax Credit: The child tax credit (previously $1,000 per child per child under age 17) has been increased to $2,000 per qualifying child. They’ve also increased the phase-out levels to $400,000 for Married Filing Jointly (MFJ) and $200,000 for Single filers.The refundable portion of the child tax credit (where you might receive back more in a refund than you paid in taxes) is limited to $1,400 per child. A $500 credit is allowed for any dependent who is not a qualifying child.

529 Savings Plans: They’re not just for college any more. Starting in 2018, $10,000 per student can be used for elementary through high school tuition. College use of a plan does not face the $10,000 annual limit.

Child Tax Rates: The “Kiddie Tax” – where a dependent child’s investment income was taxed at the typically higher rates of their parent – has been modified.

Alternative Minimum Tax: The dreaded Alternative Minimum Tax (AMT) has higher exemption amounts and while it still exists, it is expected to impact fewer individuals.
Gift taxes: The gift tax exclusion has been increased to $15,000, from $14,000.

Estate Taxes: The Estate Tax exemption has increased to $11,200,000 for individuals, and $22,400,000 for married couples.

Due to the last two changes described, high net worth individuals may want to consider revisiting their estate and gifting strategy.

5. Changes that Start in 2019 and Beyond

If you’re getting divorced, alimony related payments won’t be counted any more. Beginning with divorce settlements and agreements enacted in 2019 and later, payments related to alimony agreements are no longer deductible for the payer, and will not be considered income to the recipient. Anything in place before 2019 will be grandfathered in (meaning still deductible on one side and taxable income on the other side).

You’ll no longer pay a penalty if you don’t purchase individual health insurance; the Affordable Care Act “Individual Mandate” goes away. The shared responsibility payment owed if a taxpayer doesn’t enroll in a health insurance plan is repealed, starting in 2019.

Some of the changes are temporary. Most of the individual tax rate changes are scheduled to revert back to the old code after 2025.

Tax Reform Effecting Business Owners, Professional Corporations & Real Estate Investors

1. C Corporations Deserve a Closer Look

C Corporation income is now taxed at a flat 21%. This includes many types of small businesses and personal service corporations such as medical, legal and accounting practices, which were previously taxed at a flat 35%. Dividends paid from a C Corporation will still be taxed at the individual level, but the decreased C Corporation rate makes them more attractive. Some C corporations meeting certain conditions qualify their shareholders for a capital gain exclusion on sale of corporate stock, increasing their advantages even further.

C Corporations are excluded from the new rules on Qualified Business Income, discussed below.

 

2. A Big New Tax Cut on Pass-Through Business income.



Qualified Business Income (QBI) Under Tax Reform

Pass-through income from sole proprietorships, S corporations or entities such as LLCs that are a qualified trade or business can receive up to a 20% deduction of their income that is generated from the qualified trade or business. Income from real estate assets would typically fall under QBI tax treatment. The end result of the QBI deduction is a lower income tax rate on the pass-through business income. One of the wrinkles is that S Corporation shareholder wages do not count as qualifying business income (i.e. they do not receive a 20% deduction). Do not interpret this to mean that S corporations are going to necessarily be less advantageous than other pass-through options. The IRS still requires S Corporation shareholders to take a reasonable salary.

The QBI deduction is very complicated and convoluted, despite Congress’ stated goals of simplification. One of the points of confusion is how different types of businesses are treated differently for the QBI deduction phaseout.

QBI Deduction Limitations
If personal taxable income is greater than $315,000 for MFJ, or $157,500 for other statuses, then the 20% QBI deduction can be limited.
For many businesses subject to the limitation, the 20% deduction is limited to the greater of
1) 50% of the W-2 wages paid for business , or
2) The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified business property that hasn’t been fully depreciated.

QBI Deduction Limitation That Is Treated Differently
For QBI deduction limitation purposes, most service based businesses or those businesses whose primary asset is the reputation of the owner or an employee(s) are treated differently. (Think law firms, doctors, dentists, etc — but architects and engineers don’t fall under this definition.)
For these types of businesses, the 20% QBI deduction is phased out between $315,001-$415,000 for Married Filing Jointly, or $157,501 to $207,500 for individuals and heads of household. It’s not subject to the the QBI deduction limitations previously referenced; it is simply phased out, and the benefit is lost. This phaseout can result in a mind-boggling, almost 70% effective marginal tax on income earned above the phase-out range as the deduction is lost on income that was previously eligible.

3. Other Changes Affecting Business Taxes

Depreciation

  •  Computers are no longer considered listed property, which will make them easier to depreciate more quickly.
  • The annual 179 depreciation limit was increased to $1,000,000 (up from $510,000). The phaseout threshold was increased to $2,500,000.
  • 100% bonus depreciation is allowed on both used and new property.

All of this means it will be easier to expense business equipment in the first year.

Accrual Method of Accounting
As of 2018, both C corporations and flow-through entities (partnerships and S corps) can use the cash method of accounting for tax purposes if average 3 year gross receipts are less than $25,000,000.

Uniform Capitalization Rules (UNICAP)
The UNICAP rules for inventory calculations now only apply where the three-year gross receipt average is greater than $25,000,000.

Business interest deductions
Limited to 30% of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for businesses that have averaged greater than $25,000,000 in revenue over the last 3 years. Motor vehicle dealers using loans for floor plans are not subject to this limitation.

Net Operating Losses (NOLs)
Can no longer be carried back- they can still be carried forward, but carry-forward can only offset 80% of taxable income.

1031 like-kind exchanges
Now allowed only for real estate.

Domestic Production Activities Deduction
Eliminated for 2018, except for C corporations which have until 2019.
No more full deductions for fringe benefits – Items like office food for employees are now subject to a 50% M & E deduction limitation. The company-paid entertainment expense deduction is eliminated. (Office parties just got a lot more expensive.)

Knowledge is Empowering, While Smart Planning Wins the Day.

Even in normal times, learning how to minimize your tax liability is both an art and a science. In this year’s rapidly changing tax environment, it’s essential that you work with a CPA firm whose professionals understand both you and how the tax laws and regulations are changing, and may continue to change. It’s reckless to assume from the headlines that you will be better off under the new tax laws; there are still too many moving parts.

Don’t assume that any previous tax structuring you’ve done is still optimal. Whatever you do, don’t wait until 2019 to discover that you could have done something today to lower your taxes significantly for all of 2018. We look forward to helping you assess your situation, weigh your options, and to help with making any structural changes that can minimize your annual tax bills going forward.

Our 2018 Tax Reform Challenge

At Adam Shay CPA, PLLC, we have set an audacious goal for 2018: We are striving to save our clients a combined $1 MILLION on their 2018 income taxes!

It’s a tough challenge, but we’re ready. We’ll be looking under every rock and crevice of the new tax code to find every possible savings for every single one of our clients that engages us for this purpose, in order to meet our cumulative million dollar goal and to help our clients maximize their post tax cash flow.

To participate in our Challenge:
1.Book an appointment this spring for a Tax Reform assessment.
2. Call (910) 256-3456 or email [email protected] to inquire about our full suite of business and personal income tax services.
3. Attend one of our tax reform webinars.
4. Share this guide with a friend who needs help navigating the new tax reform provisions.

To stay connected and updated join our email newsletter.

Shutting Down a Business? File Your Final Taxes On Time and Avoid the Short Year Trap.

Filing a late partnership or S corporation tax return has gotten increasingly expensive over the last 10 years. In 2006, the penalty per month, per partner/shareholder was $50. For 2018 that penalty is $195 per month, per partner/shareholder. This means that if a partnership with two partners who fail to file an extension for their tax return, but still file by September 15th would face $1,950 in penalties from the IRS. The maximum months that penalties can be assessed are 12, but consider the client who may be a few years behind in filings and has multiple shareholders. These penalties can quickly reach the $10,000 plus mark.

If you are a business owner the above situation may not apply to you. You always file timely or get an extension and feel confident your tax professional filed your income tax returns when they said they did.  Yes, we have seen cases where the client believed the tax returns were filed when in fact they were not. Relying on a professional alone is not sufficient cause for the IRS to provide penalty relief. If you are someone out there dealing with penalty issues from the IRS there can be relief and we can help you reduce or alleviate those penalties. For the purposes of this blog, let’s assume all returns have been filed timely.

Where business owners can fall into what I will call the “short year trap” is when a change in ownership of the business occurs or the business is sold. The requirement to file a tax return is by the 15th of the 3rd month following the date the entity’s tax year ended for S Corporations and the 15th of the 4th month following the date the entity’s tax year ended for partnership. Notice that these instructions say the entity’s tax year ended – not the end of the calendar year. If you are a sole owner of a S corporation, sell your business, and shut down all entity operations on 7/15/2018 there is a tax return filing requirement before 3/15/2019. The same requirements apply with a technical termination of a partnership. If a sale of exchange of 50% or more of the ownership occurs in a 12 month period, that is a technical termination and a final tax return must be filed.

Contact Adam Shay CPA Firm in Wilmington NC for Help

Like with most tax returns, extensions are available, but you need to notify your CPA in Wilmington NC, at a minimum, when these events occur to help make sure you are in compliance and avoid late filing penalties. We want to be involved with and notified by our clients before these transactions happen to help walk them through the tax implications of selling a business, ending a partnership, or changing ownership. Even if the business no longer exists, the IRS may have the ability to reach individual assets to collect these penalties. Avoid falling into the short year trap by keeping communication open with your tax professional, Adam Shay CPA Wilmington NC.

The Self Employed Vicious Tax Cycle

Let us lay out a scenario. You are a self employed individual. You are meeting with your tax accountant to complete your taxes by April 15 and are told that you owe a bundle in taxes for the year. In addition to the thousands you owe (that is due by April 15), your tax accountant advises you to also make your first estimated tax payment for the current year(also due April 15).

You simply do not have the money. You get set up on a payment plan to pay the balance due and because you are paying off this amount, you surely cannot make estimates for this year. At this rate, it feels as though you will never catch up. Does this sound familiar? Let’s talk about the vicious cycle of taxes and why estimated tax payments are important.

Estimated tax payments are due April 15, June 15, September 15, and January 15 (Note: The 4th quarter payment is due in the following year). Particularly, if you are a self employed individual, you should be making estimated tax payments. If you do not, with 100% certainty, you WILL owe every year. When you are self employed, your income has no withholding. You are on the hook for federal tax, state tax, but also self employment tax on this income.

To illustrate, think back to a time when you were a W-2 employee. Your actual pay was $2,000 but by the time you got your check, it felt like only a small portion was deposited in your account. The difference between your gross check and net check was a result of all those taxes are being taken out each paycheck. When you transition over to a position where you are getting a 1099, you are now considered self-employed and are responsible for paying these taxes on your own. This is a very important concept to understand.

We believe that proper planning starting in the beginning of the year can alleviate the illusion that you do not have the available funds to pay taxes at year end. I say illusion, because if your business is profitable, you did have the money at some point, you just spent it on something other than taxes. If you choose to put aside funds and pay as you go, you will never have such a large balance at year end. Being proactive and making the estimated payments will leave you from having a large amount due at year end, as well as help you to avoid associated underpayment penalties.

We attempt to explain this to clients before they get caught up in the vicious cycle. If you are already at the point where you are in the cycle, there is a way out. This will take planning and budgeting, but it will be worth it in the end. Please let us know if you have questions.

Tax Extenders Passed!

We are excited about the most recent bill the President has signed. All parties have finally agreed and the President has signed the Protecting Americans from Tax Hikes Act of 2015, also known as the PATH Act. The Act not only extends numerous provisions, but also makes at least 20 provisions permanent.

Key Highlights:

  • Many tax provisions previously expired in 2014 have been extended for 2015 and 2016 or even made permanent beyond that.
  • Section 179 and bonus depreciation tweaks help business owners.
  • Several small tweaks for individual taxpayers to provide credits and/or deductions.
  • W2 forms must now be filed with the IRS on same date they are due to employees (1/31).

Probably the most pertinent provision that was made permanent and the provision that business owners wait on every year is Section 179. First of all, the deduction is retroactively reinstated for all of 2015 and then is permanently extended after this year. Using Section 179, taxpayers will be allowed a $500,000 annual deduction, with a $2,000,000 phase-out threshold. This is much improved from the previous $25,000 deduction limitation. After 2015, the $500,000 deduction and $2,000,000 threshold will be indexed every year for inflation. The Section 179 deduction is also permanently available for qualified real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. For 2015, there is a $250,000 limitation on qualified real property, but after 2015, there is no limitation.

Bonus depreciation was not permanently extended. Rather, it has been retroactively reinstated for 2015 and extended through 2019.

In 2014, the IRS passed a de minimis safe harbor rule that allowed taxpayers without an applicable financial statement to directly expense (instead of having to depreciate) assets that cost under $500, rather than having to list them on the depreciation schedule. Effective 1/1/16, the de minimis safe harbor amount increases to $2,500. The IRS did say that they will not challenge use of the $2,500 de minimis amount for periods before 2016 as long as certain requirements are met.

The following are other business notable provisions that were made permanent (note – only some of the permanent provisions have been highlighted):

  • Research & Experimentation Credit.
  • 15-year straight-line cost recovery for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
  • 5-year waiting period for S Corporations to Avoid Built-In Gains Tax.
  • Enhanced Charitable Contribution Deduction for Food Inventory.

The following are other individual notable provisions that were made permanent (note – only some of the permanent provisions have been highlighted):

  • $3,000 earned income threshold for computing the 15% Refundable Child Tax Credit.
  • American Opportunity Tax Credit (credit available for up to $2,500).
  • Earned Income Tax Credit for Qualifying Individuals with 3 or more qualifying children.
  • $250 deduction for certain expenses of elementary and secondary school teachers (after 2015, the amount will be indexed every year for inflation).
  • Election to deduct state and local general sales tax as itemized deduction instead of state and local income taxes.
  • Tax-free IRA Distributions to Charities of up to $100,000 for those at least 70½.

The following are notable provisions that were retroactively reinstated for 2015 and extended through 2019 (note –only some of the permanent provisions have been highlighted):

  • Work Opportunity Tax Credit.

The following are notable provisions that were retroactively reinstated for 2015 and extended through 2016 (note –only some of the permanent provisions have been highlighted):

  • Income Exclusion for Discharge of up to $2,000,000 of Qualified Principal Residence Indebtedness.
  • Qualified Higher Education Expenses Deduction (up to $4,000).
  • Deduction of Mortgage Insurance Premiums as Qualified Residence Interest.
  • Energy-Efficient Home Improvement Credit.

 

The PATH Act also created some new provisions. Employer copies of W-2s, W-3s, and 1099s will be due by January 31 (the same date that forms are due to recipient). Also, after 2015 1098-T Forms will only include qualified tuition and related expenses actually paid, versus previous forms that could report amounts billed or paid. In relation to education expenses, after 2015 anyone claiming the American Opportunity Tax Credit will have to report the employer identification number of the educational institute on their tax return.

The PATH Act is great news for taxpayers and tax practitioners, as it will remove uncertainty moving forward about items such as the Section 179 deduction. If you have any questions about the PATH Act, or provisions that may affect you, please feel free to contact us.

Accounting related products and services is not something I typically associate with the National Football League. However, during Monday Night Football there was quite a few commercials that related to the accounting field. It may be indicative of advertisers believing in a growing population of self-employed individuals and the desire to “be your own boss”. Monday night there were several commercials for new products that could benefit our business owners worth sharing.

MileIQ

A common struggle for business owners is capturing all the travel on either their personal or business vehicles. MileIQ is striving to ease that burden by providing “complete, accurate, and IRS-compliant documentation to back up the mileage deduction”. The application is available via the Apple App Store and has been live since late 2013. With the application, business owners can classify travel as personal or business with a single swipe when they get in the car. The data is secure with syncing to the cloud and can also integrate with accounting software. If you are or know a business owner that struggles with accounting for your mileage at tax time, go to MileIQ’s website and check out this practical solution that can mean significant tax savings.

https://www.mileiq.com/tour

Namely

As a technology forward firm we focus on keeping up-to-date on the latest companies in accounting markets that drive efficiency. Namely seeks to merge human resources (HR), payroll, benefits, and talent management into one system. Outsourcing HR and talent management can be attractive to a lot of our small business owners who want those services, but are not large enough to require a separate employee or department. Namely was founding in 2012 and the commercial caught my attention by highlighting one of their goals “client centric”. They advertise to respond quickly to “client needs and challenges” which is extremely important for our entrepreneurs and their busy schedules. Their blog also contains some informative articles that business owners could benefit from.

http://www.namely.com/tour/

Keeping new and useful services in front of our clients is important to us. If there are products services that have contributed to your business’ success, please let us know!

On July 31, 2015, President Obama signed the highway funding bill into law.  While it sounds like this law would not have any effect on you, it may potentially impact you.  We have now learned that buried into the bill there was a provision to change certain tax return due dates.  Most of the new due dates will begin with 2016 tax returns in the 2017 filing season.  The following chart summarizes the original due dates, and the new due dates per the bill.

Return Type

Current Initial and Extended Due Date

New Initial and Extended Due Date

Partnership – Form 1065 (Calendar Year)

April 15

September 15

March 15

September 15

Trust and Estate – Form 1041

April 15

September 15

April 15

September 30

C Corporation – Form 1120

(Calendar Year)

March 15

September 15

Before 12/31/2025

April 15

September 15

After 12/31/2025

April 15

October 15

C Corporation – Form 1120

(6/30 Fiscal Year)

September 15

March 15

 

After 12/31/2025

October 15

April 15

 

C-corporations have an interesting provision.  Through December 31, 2025, if the C-corporation is on a calendar year, then the initial due date will be April 15 and extended due date will be September 15.  After December 31, 2025, the initial due date remains April 15, but the extended due date changes to October 15.  If the C-corporation has a June 30 year-end, the new due dates will not go into effect until after December 31, 2025, with the initial due date being October 15 and the extended due date being April 15.  Once we get to 2026, all C-corporations will have an initial due date of the 15th day of the fourth month following the close of the corporation’s year end.  Also, once we get to 2026, all C-corporations will be allowed a six-month extension.

Partnership returns on a fiscal year end will have an initial due date of the 15th day of the third month following the close of the fiscal year.  The partnership return will be allowed a six month extension from the initial due date.   As reflected in the above table, calendar year partnerships will have an initial due date of March 15 and extended due date of September 15, once the law goes into effect.

Exempt organizations that file Form 990 will receive a single, automatic 6-month extension once the law goes into effect.  The initial due date for a 990 is the 15th day of the fifth month following the year-end.

S-corporations due dates did not change – the initial due date is March 15, and the extended due date remains September 15.  Once the law takes effect, partnership and S-corporations due dates will align.  One positive outcome of the change is that partnership K-1’s will initially be due one month before the personal return.  This will give tax return preparers some breathing room to receive K-1’s for personal returns, and potentially get the personal return filed before April 15.  Of course, some returns will still have to be extended, but I am looking forward to having initial partnership return due dates one month before the personal return due date.

Every business, no matter its size goes through four stages of business growth.  With this growth comes delight as well as the dreaded growing pains. 

The first stage is called Core Business Development.  The single priority is to sell your service or product.  Spending all of your time figuring out how to sell to your target market.  Once you can figure out who your market is, you will need the perfect way to get in front of them.  Within this stage, the main difficulties of the business are obtaining customers and delivering your service or product.  The company's strategy is simply to stay alive.  The challenges are market acceptance, business structure and wondering if your idea will be profitable.

The second stage is Start-up.  At this point you have become an expert in selling your service or product.  You have cornered the market and now it's time to find additional customers.  This is when you move from one service or product to multiples as quickly as possible.  Creating new brands, diversifying and growing new business.  At this point, the business has become an established ,workable business entity.  The organization is still simple.  Systems development is minimal and planning is basically cash forecasting.  Many companies remain at this stage for some time.  In this stage, establishing a customer base and market presence are highlighted.  The owner also needs to make certain the cash is managed appropriately.

Expansion is the third stage.  Also known as Growth/Survival .  In this stage, you are generally moving much too fast for your own good.  In the sense of the organization, the company has grown large enough to require functional managers' to take over certain duties from the owner.  Basic financial, marketing and production systems are in place.  Monitoring protocols should also be put into place at this stage.  As the business matures, it and its owner start to move apart.  Much of this is due to the owner placing responsibility on the managers.  Challenges in this stage include moving into new markets, expanding existing business while adding new products or services.  There may also be increased market competition.

Maturity – To Sustain and Produce.  After a successful expansion, you are at the final stage of the business lifecycle.  Your business could still be growing but not at a substantial rate.  In this stage, as an owner you need to take a step back towards the expansion stage or to think of a possible exit strategy.  In this last stage, you experience all of the difficulty in the expansion stage but with the added hurdle of an exit strategy.

                We have been working to educate our clients on the impact of the Affordable Care Act. Employers are no longer allowed to provide employees with reimbursement plans for the cost of health insurance. Employers who do not comply with this are in violation of the Act and can be subject to a $100 per day per employee excise tax. In February 2015, the IRS issued Notice 2015-17 that provided small business owners additional time to comply with the Act. Here are the important deadlines:

June 30th, 2015

Employers are no longer allowed to reimburse employees for the cost of their health insurance. Even if the reimbursement was run through payroll previously, it can no longer be a separate line item on an employee’s pay stub. Employers can work around this issue by providing a salary increase equivalent to the reimbursement for each employee. If reimbursements have occurred after 6/30 we recommend amending those payroll reports to include that reimbursement as compensation or have the employee reimburse the employer the funds.

December 31st, 2015

Employers are no longer allowed to reimburse greater than 2% shareholders for the cost of their health insurance. For most clients, we are advising to take the money as a distribution to cover the cost of their insurance instead.

The other option is to provide an employer health insurance plan. Due to the rising costs of health insurance this could be an attractive, deductible option to employers instead of raises or bonuses. Employees without employer health insurance coverage are facing rising costs as well and could appreciate the benefit.

We recommend consulting an insurance professional for your individual company needs and Act compliance requirements.

"I am on payroll and receive a paycheck but also take out distributions. Are distributions from my S-Corporation taxable?" Generally, no.

Let me explain. You are taxed on the net profit of the business in any given year. Whether you take it out as distributions or leave it in the company, you will be taxed on the actual profit in the year that you made it.

Let's apply some numbers to this. Let's say in 2018 you made $100,000 income and had $75,000 in expenses. Your net profit (income minus expenses) is $25,000. This is the business income that you will be taxed on in 2018. You can leave it in the business bank account or take it out as distributions, but that $25,000 is taxable income either way.

In addition, let's say you took $15,000 out as distributions in 2018 leaving $10,000 in the business bank account.

Moving to the next year: In 2019, your net income was only $10,000. You proceeded to take out $15,000 in distributions. This is over what you made in 2019! Are you taxed on this? The answer is NO. Why not? You still have $10,000 from 2018 in "retained earnings". You have already been taxed on that number in 2018.

Instead of thinking of distributions alone, think of it more in terms of financial statements – specifically, the Profit and Loss Statement. What allows you to be able to take distributions? If it was profit, you are taxed on the actual profit in the year in which you made it. What you do with that profit is up to you. This is a complex topic that tends to confuse business owners. If you have any questions or need further guidance, it's best to contact us for help.