Building business credit

[no_worries]

I have enough expenses to show, to pay very little to no tax on my corporate return.

S corps are not taxed except on certain capital gains and non-passive income. Therefore, odds are you shouldn't be paying tax on your corporate return no matter how much you're making.

And just one more, for good measure:

One of the goals of the IRS is to determine if S-corporation owners are paying themselves reasonable wages before paying dividends. Before paying employment-tax-free dividends, it's expected that officers in an S corporation will first receive an appropriate wage for their services to the corporation.

For example, suppose the owner of an S corporation worked full-time in the company and paid himself $90,000 in dividends, without taking any wages. That's a no-no. The IRS expects to see a reasonable salary before dividends are paid. If the entrepreneur had paid out this money as salary, it would be subject to about $14,000 in employment taxes. Of course, it's not necessary to pay all the $90,000 in salary. It depends upon what's considered reasonable. For example, maybe a salary of $45,000 could be paid and $45,000 taken out as dividends. That would amount to a tax savings of about $7,000. And, that could be fully legitimate.

Again, I'm not saying anyone is doing anything wrong. But if you're driving a truck and paying yourself $10,000 in wages and $20,000 in dividends or distributions, you wouldn't survive an audit. Many less than scrupulous accountants will tell their clients that this is fine because they know that the odds of getting audited are slim and the more they save their client the happier the client will be. Just remember, if you ever are audited, it's not your accountant that pays the penalty.

Many who have posted may be in compliance simply because their numbers happen to add up. But the understanding of the IRS rules as explained are simply incorrect. But hey, the odds of being audited are small so roll the dice. Pass-through entities, which includes S corps, partnerships, and LLC's, have a much lower audit rate than sole proprietors.

[pepe4158]

I don't know, Socialism usually implies high taxes. I paid about $250 in income tax to CA last year. I'm not complaining

Ummm how did you pay so little? Lots of deductions, or little income....what was your secret...plz spill the beans?
We actually do have one of the higher income taxes of the states, we have one of the highest sales taxes, n business have been leaving for other states the last 20 years, we lost Huges, Rockedyne, G.D., and Nothrop, all heavy industry that pay good wages that packed up and went to Phoenix cuz they thought they would get a better tax deal from Arizona. Ohhh yeah quess where we rank on gas tax?
http://answers.yahoo.com/question/in...4225219AAhK0pb

[no_worries]

As far as taxes are concerned, "lots of deductions" and "little income" are just different ways of saying the same thing :wink: We didn't work much last year, the gross was a hair over $190,000.

I'd be careful about where you get your information. Don't go to a site like that when you can easily find the correct information. Actually, there are 37 states that have a higher gasoline tax than California. It's true that our income taxes are higher on average. But, there are 6 different tax brackets and a decent number of offsets, so the real tax rate could vary substantially. I'd pay more in several other states. We do rank 8th in sales tax, but out of the 46 states with a sales tax, the lowest rate is 2.25% lower than ours. That means if you spent $20,000 taxable in a year, the difference would be $450.

The companies you mentioned are all aerospace related. The industry had a major collapse back in the late 80's and early 90's. This was due mostly to the end of the Cold War and major budget cuts in defense programs. When those companies reduced their size, they no longer needed the large facilities they occupied. Since it was prudent to move anyway, they looked for better deals elsewhere. Both for tax reasons, although predominantly related to CA's high workmen's comp costs, and other cost considerations. One of the attractions to AZ was the huge difference in property cost and a much lower cost of living which would enable them to pay lower wages. There's still a significant aerospace presence in the area. I live down the street from a huge Boeing facility.

I agree that CA is one the most expensive, if not the most expensive, states to live in. But depending on your situation, taxes are likely only a small part of that reason.

[GMAN]

I have enough expenses to show, to pay very little to no tax on my corporate return.

S corps are not taxed except on certain capital gains and non-passive income. Therefore, odds are you shouldn't be paying tax on your corporate return no matter how much you're making.

And just one more, for good measure:

One of the goals of the IRS is to determine if S-corporation owners are paying themselves reasonable wages before paying dividends. Before paying employment-tax-free dividends, it's expected that officers in an S corporation will first receive an appropriate wage for their services to the corporation.

For example, suppose the owner of an S corporation worked full-time in the company and paid himself $90,000 in dividends, without taking any wages. That's a no-no. The IRS expects to see a reasonable salary before dividends are paid. If the entrepreneur had paid out this money as salary, it would be subject to about $14,000 in employment taxes. Of course, it's not necessary to pay all the $90,000 in salary. It depends upon what's considered reasonable. For example, maybe a salary of $45,000 could be paid and $45,000 taken out as dividends. That would amount to a tax savings of about $7,000. And, that could be fully legitimate.

Again, I'm not saying anyone is doing anything wrong. But if you're driving a truck and paying yourself $10,000 in wages and $20,000 in dividends or distributions, you wouldn't survive an audit. Many less than scrupulous accountants will tell their clients that this is fine because they know that the odds of getting audited are slim and the more they save their client the happier the client will be. Just remember, if you ever are audited, it's not your accountant that pays the penalty.

Many who have posted may be in compliance simply because their numbers happen to add up. But the understanding of the IRS rules as explained are simply incorrect. But hey, the odds of being audited are small so roll the dice. Pass-through entities, which includes S corps, partnerships, and LLC's, have a much lower audit rate than sole proprietors.

One thing you should remember when looking at salaries is the job description. I am not a driver but the CEO of my corporation. Some CEO's of trucking companies may make more than $1MM/yr. I don't think that I will pay myself that much salary. When one talks about a salary that is reasonable for the job description, there is a wide range in salaries. Some will do good to make $30,000/yr. I know of some who will make over $120,000. What is reasonable for one may not be reasonable for another person. The IRS doesn't establish minimum wages for certain industries. It is Congress who does that. However, you can pay yourself any salary you wish. You are correct about interpretation by the IRS, at least to a point. After all there are over 11,000 pages of rules. It is difficult to know everything. I have had the IRS take a very close look at my tax returns and they haven't questioned my salary, or lack thereof. I have filed returns without any salary, only income from my business.

I have owned several corporations over more than 30 years. So far, I have not had any major problems with the IRS. The best thing for you to do is consult with a trusted tax preparer to see what is right for your situation. I have owned S and regular C corporations. For the smaller corporation, I think the S election is the best way to go for tax purposes. If you use a regular C corporation, you could be taxed twice. Regular corporations are usually taxed on the corporate profits and then shareholders are again taxed on any dividends paid to them.

[no_worries]

GMAN, first let me say that I have no doubt that you don't have any issues for two reasons. First, I have only ever said that incorporating is not the wisest choice for a one-truck operation. You run more than one truck, therefore you do not fall into that category. Someone with more than one truck should incorporate purely for the liability protection. Second, I'm familiar with your posts from various forums over the years. My guess is that you don't annually pay yourself a salary and then pay yourself three times that in dividends. In other words, I doubt that you're compensation is unreasonable. My intent has been merely to correct those who either believe or are told that if they incorporate they can drastically reduce their taxes by shielding the bulk of their pay.