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The IRS Targets Income Tricks

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Re: The IRS Targets Income Tricks

#51

Post by anonymous246 »

jabits wrote: post #13
anonymous246 wrote: post #11

This is one of those few instances where I actually support the IRS and also support the law that's being contemplated. S corps (and AFAIK LLCs) are supposed to have "pass through" taxation. I think it's fair that all income (whether salary or profit distributions) from S Corp is treated as regular W-2 income. If you don't care about the simplicity that "pass through" offers, register a C-corp.

So then as a small Sub-S owner (wife and me), I would have to pay FICA and Medicare on the money spent on health care insurance, disability insurance, etc., which you as a W-2 employee do not pay payroll taxes on. In the end, the payroll tax savings are not that great for a small Sub-S. And as you get older, toward retirement, if you pay yourself too low, you take a big hit on SSA benefit payments (which are based on…

Since you asked me, yes, my two cents is if you pay for insurance out of distributed profits, you should be treated exactly the same was as a W-2 employee with no health benefits buying insurance on his own would be (I'm stating it this way because I don't know the payroll tax situation for a W-2 employee w/o benefits buying them himself).

If the benefits are provided by the S-corp to employees (i.e., to you), I don't think the question arises. The money used to buy the employees' insurance is removed from the profits, so it won't be part of distributed profits. Since tax is only on income, you won't pay taxes on insurance.

Re: The IRS Targets Income Tricks

#52

Post by DenisM »

camz wrote: post #39

I'd like to clarify the issue. Personally, I think that the CPA in question in the article is an idiot for a number for reasons. (1) He's an accountant so he should've known that playing this game with the IRS as a CPA is begging the IRS to slam you. (2) Litigating a losing position like this so publicly is going to kill your reputation and put you on the IRS' top 10 favs list for life. This is a very clear issue act…

Does any of this apply if you're not distributing the cash at all? Say, I am making money in my S-Corp, but I keep all of it in the bank (minus the expenses) and instead live off my savings. The plan is to save enough to expand the business, but for now the money is just sitting there, doing nothing.

Re: The IRS Targets Income Tricks

#53

Post by anonymous246 »

wuputah wrote: post #27
anonymous246 wrote: post #11

This is one of those few instances where I actually support the IRS and also support the law that's being contemplated. S corps (and AFAIK LLCs) are supposed to have "pass through" taxation. I think it's fair that all income (whether salary or profit distributions) from S Corp is treated as regular W-2 income. If you don't care about the simplicity that "pass through" offers, register a C-corp.

Per the IRS: > The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return. As for your suggestion that all pass-through income is W-2 income - that would never work. It implies that all business "profits" were paid to its shareholders (that's what payroll / W-2 income is). A cash distri…

I don't know how it is for S-corps with passthrough, but for LLCs opting for passthrough taxation results in exactly what you describe: you owe taxes even though the profits were not distributed to you because the company decided to reinvest. Search for "allocated profits", "distributed profits", and "phantom income". You owe taxes on allocated profits, not distributed profits.

Opting to be taxed as a coporation (or C-corp) avoids all these problems (at the expense of "double taxation").

Re: The IRS Targets Income Tricks

#54

Post by DenisM »

tptacek wrote: post #48
jrockway wrote: post #34

Wow, a mandatory minimum wage for professionals. I estimate that this will last for about ten more minutes.

It's not a "mandatory minimum wage". Stop trolling. You can pay yourself $0.50/yr if you'd like; you just can't do it will paying yourself tens of thousands in distributions.

So if I am not distributing anything, I don't need to worry about the "reasonable wage" rule, right?

Re: The IRS Targets Income Tricks

#55

Post by archangel_one »

hugh3 wrote: post #46
tptacek wrote: post #18

Earlier quoted context omitted.

This implies that if you simplified the tax code, people would stop gaming it. The opposite is probably true; the simpler you made the tax code, the more accessible tax games would be to average taxpayers.

Which is why you simplify it in such a way as to make tax games impossible. Here's my favoured solution: the US Government spent $3.6 trillion this year. There are 280 million people living there. Therefore, Federal tax should be a flat $12,857 per person. For the average income earner, this is about the same as they're already paying. For those earning more, they find they're incentivised to work harder, since every…

"The kick in the butt they need"? Under that system there would presumably be a considerable number of people who could no longer afford to live - a family of four would be taxed over $50,000 which they might well not be able to earn, let alone earning enough more than that to pay rent and buy food. Not everyone can be an above-average earner.

I'm all for the idea of simplifying tax systems, but your idea doesn't remotely work.

Re: The IRS Targets Income Tricks

#56

Post by johnwatson11218 »

notauser wrote: post #35
johnwatson11218 wrote: post #30

Can anyone comment on how personal income tax is handled in other countries? I don't mind paying tax but I hate the fact that I can take my paper work to several different tax preparation services and get different tax bills. In some cases I have heard of people owning the IRS thousands, going somewhere else and claiming a refund. Is the US the only country in the world where 2 to 3 percent of our GDP goes into tax p…

In the UK personal taxes are generally automatically handled by the employer. You just get the post-tax income transferred into your bank every month, and a payslip showing the deductions that were made. (Outsourced PAYE administration costs about £20 per month for a very small company.) It gets more complicated when you can't do taxes through PAYE for any reason - unearned income, dividends, directorships etc. My ow…

I read a book by Jim Rogers, I think it was "Investment Biker" and he said that the US is the laughing stock of the developed world because of the way our incomes taxes work. He said that in Australia you have one form the size of a postcard that everybody mails in once a year.

Re: The IRS Targets Income Tricks

#57

Post by smokeyj »

jrockway wrote: post #36
JeffL wrote: post #32

Seems like if we just had a large sales tax, rather than income taxes, none of these things would be so complicated, and we'd save so much money on the cost of compliance.

A large sales tax is an unfair tax on the poor. Why should people making $20,000 a year pay the same tax on their groceries as someone making $1,000,000 a year?

If consumption is taxed the poor will have less purchasing power. If production is taxed the poor will have less jobs and less money. Empowering the poor will not come by penalizing production or consumption, but by empowering the wealth producers.

Re: The IRS Targets Income Tricks

#58

Post by abalashov »

tptacek wrote: post #29
tbrownaw wrote: post #24

Earlier quoted context omitted.

> What makes this a particularly easy rule of thumb to follow is that it's exactly what you would do anyways if you didn't know about the S-Corp loophole. So if everyone is supposed to pretend it doesn't exist, why does it exist?

The tax structure S-Corp owners are taking advantage of is the one that governs investment income. These people are deliberately reclassifying their compensation as return on the investment of having started a business.

Thanks, that clears it up. I was reading the article wondering since when these people don't have to pay SEP taxes.

Re: The IRS Targets Income Tricks

#59

Post by hnl2sea2nrt »

rubyrescue wrote: post #37
patio11 wrote: post #6

Small businesses are somewhat notorious for aggressively interpreting the tax code in one's favor, largely because they have a variety of options for doing so not available to the W-2 employee. The game theory sort of incentivizes it, too: heads you save 100% of the taxes at issue, tails you have to pay the taxes at issue and (if you had any sort of a good faith case) only interest at a below-market rate on them... a…

i just realized the both of us need to start an american-expat-tech-entrepreneur-tax forum. a few other people are in the same boat and email me based on my profile from time to time. I find i know much more about IRS tax code regarding form 2555 than most US accountants because they just don't deal with it much, OR, the ones that have charge way more than I can afford to help me with my questions - but i haven't fou…

I would join as well. Very complicated issue without much affordable help available.

Re: The IRS Targets Income Tricks

#60

Post by tptacek »

DenisM wrote: post #54
tptacek wrote: post #48

Earlier quoted context omitted.

It's not a "mandatory minimum wage". Stop trolling. You can pay yourself $0.50/yr if you'd like; you just can't do it will paying yourself tens of thousands in distributions.

So if I am not distributing anything, I don't need to worry about the "reasonable wage" rule, right?

I think it's safe to say that if you don't know about the S-Corp FICA tax dodge, you're not going to run afoul of the IRS over it.
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