The Appletree Core Newsletter – Accounting, Payroll, and Tax CPA in Londonderry, NH

Did you know that individuals who stand the highest chance of getting audited outside of those who make in excess of 1 million a year are sole proprietors and single member limited liability company’s that file their tax returns on Schedule C of Form 1040?

Did you know that New Hampshire  has some new rules that require you to better substantiate the ‘reasonable compensation’ you are taking on your Business Profits tax return to avoid the 8.5% business profits tax?

Have you thought about why you are continuing to operate and be subject to a higher level of audit exposure? What if you are already an LLC, and want to make some changes but don’t want to go the hassle of a legal name change?

I can show you a way to fix all this.

Consider operating as an S Corporation. There are special provisions in the tax code that permit an LLC to operate as an S Corporation, and you can do it without having to change your Federal ID number and still keep the exact same legal name you’ve always been.

As an S Corporation, a separate corporate tax return is filed at the end of the year, and the S Corporation issues the owner a K-1 that summarizes the profit and loss, which is then put on the individual 1040. Typically, the owner would also be an employee and receive an W-2 at the end of the year , just like all the other employees. Generally, an S corporation never pays taxes to the IRS.

This does a couple of things. First, you may no longer have to make quarterly tax payments since you’re an employee. You’ll have taxes taken out of your paycheck instead. If you had no employees before, you’ll be required to file quarterly tax returns with both the Federal and state governments for both withholding and for unemployment taxes.

Second, the audit risk drops dramatically. From my own experience, we’ve found that when auditors do come in to audit our S Corporation clients, they often try to ignore the S Corporation, unless they start to seem evidence of inconsistency with the individual. S Corps seem to rarely get audited directly, though when they do, it’s usually for  pretty good reason, and usually one my office eyeballs before the return’s completed (from experience, we’ve got a pretty good idea what triggers an audit).

Third, it lowers our profile with the State of New Hampshire. Since we are no longer putting a reasonable compensation amount on the tax return, essentially forcing the state to say that they believe the FEDERAL tax return is wrong if they believe that the owner wages are not reasonable. This is a larger hurdle to jump, than simply a number placed on a the state tax return at the last-minute of the year.

How large should a business be before any of this makes sense?  I would be seriously considering this if I had at least $250,000 of Gross Sales and/or net income to the owner of over $75,000.

How comfortable are you in the event you were to get audited?  Even if you are comfortable, why risk it?

I specialize in working with New Hampshire small business owners year round, developing planning ideas just  like this.

Copyright Information 2012 Professional Association of Small Business Accountants

Presented by Steven A Feinberg, CPA of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire. Steve has more than twenty-five years experience in Federal and New Hampshire issues, specializing in small business general, tax and payroll matters. For additional information on these and other current business and tax issues, email Steve at info@appletreebusiness.com or call (603) 434-2775.

Steven A. Feinberg – www.AppletreeBusiness.com – Get Appletree Blog via Email!

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