Advanced Tax Individual Project for week 5

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School

Colorado Technical University *

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Course

410

Subject

Law

Date

Feb 20, 2024

Type

docx

Pages

4

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Memorandum To: Jones and Turner From: Mary McGeorge Date: November 3, 2023 Subject: Structuring Your Business as a S-Corporation I am writing to provide you with information about the potential benefits and requirements of structuring your business as a S-Corporation. This memorandum will cover the following: 1. Requirements for structuring your business as an S-Corporation 2. Advantage of structuring your business as an S-Corporation 3. Taxation of S-Corporation income 4. Requirements for corporate officers in a S-Corporation 5. Compensation for S-Corporation officers. 6. Ethical and Legal issues regarding dividend payments 1. Requirements for structuring a business as a S Corporation To qualify for s-corporation status your business must meet certain requirements, which include: A. Eligible Entity. Your business must be a domestic business, which means that it must have been formed within the United States. It cannot have more than 100 shareholders. Shareholders must be US citizens or residents, and certain types of entities, such as partnerships and other corporations, are generally not eligible shareholders. B. Single class of stock. S Corporations can only have one class of stock. That means that all shares must have the same rights to distribution and liquidation proceeds. C. Tax year. S corporations must typically adopt a calendar year as their fiscal year; unless they can demonstrate a legitimate business purpose for a different fiscal year. D. Consent of shareholders. Shareholders must consent to the S corporations’ elections. Meeting these requirements is essential for obtaining and maintaining S corporation status. 2. Advantages for structuring as a S Corporation S Corporations have several advantages which include:
A. Flow-through taxation. One of the primary advantages of S Corporations is that they are pass- through entities for tax purposes. This means that the business itself does not pay for income taxes. Instead, the income or losses of the S corporation flow-through to the individual shareholders who will report them on their personal income taxes. B. Limited liability Like traditional corporations, S corporations provide shareholders with limited liability protection. This means that the personal assets of shareholders is generally shielded from business-related liabilities and debts. C. Avoiding Self-Employment tax. While S corporation shareholders must take a reasonable salary for their work in the business, any remaining profits can be distributed as dividends, which are not subject to the self-employment tax. 3. Taxation of S Corporation Income Income from an S Corporation is reported and taxed at the shareholder level. A. Form 1120S: This form reports the income, deductions, and credits of the business but does not pay income tax itself. B. Schedule K-1: Each shareholder will receive a schedule K-1. Shareholders use this information to report their share of income on their personal tax forms. C. Personal tax return. Shareholders report their share of the S Corporation’s income on their individual 1040 form and the income is taxed at their individual tax rates. Any salary that is taken by the shareholder is subject to employment taxes (Social Security, Medicare, etc.) but the remaining income is distributed as dividends and is not subject to payroll taxes. 4. Requirements for Corporate Officers in S Corporations S Corporations must follow specific rules regarding the officers who work in the business. It is important to note that shareholders in an S Corporation can also be officers, and there are no restrictions on the number of roles of corporate officers. It is important to note that the corporate officers must perform legitimate business for the business. 5, Compensation for Corporate Officer’s Corporate Officer’s in a S Corporation must receive reasonable compensation for the services they provide for the business. This requirement exists to prevent shareholders from avoiding employment taxes by paying themselves unreasonably low salaries and taking the remainder as dividends. Reasonable compensation is determined by several factors:
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