Business Formation

Interest Rates for Q1 and Q2 2012 will continue to be charged as follows:
3% for overpayments (2% for corporations)
3% for underpayments
5% for large corporate underpayments
0.5% for the portion of a corporate overpayment in excess of $10k.
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.
The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. Further, the federal short-term rate that applies during the third month following the taxable year also applies when determining estimated tax underpayments during the first 15 days of the fourth month following the taxable year

A partnership that pays premiums for health insurance for its partners has a choice. It may treat the premium as a reduction in distributions to its partners or deduct the premium as an expense and charge each partner's share as a guaranteed salary payment taxable to the partner. The partner reports the guaranteed payment as non-passive income on Schedule E and 100% of the premium as an adjustment on Form 1040 line 29.

Simply stated, an S Corporation is taxed in the same manner as a partnership and is not taxed at the federal level. The income or losses and expenses flow through to the shareholders. A "C" Corporation pays tax on its profits and when the owner shareholders take profits from the corporation, the distributions take the form of taxable dividends. In effect, this is a double taxation of profits. There are advantages and disadvantages to both S Corporations and Regular C Corporations. Speak to your local CPA about the tax strategies of selecting the type of entity for your business.

Guaranteed salary that is fixed without regard to partnership income is taxable as ordinary wages and not as partnership earnings. As a General partner the guaranteed salary and net partnership income is subject to self-employment tax. Limited partners do not pay self-employment taxes unless guaranteed payments are received.

An individual's share of partnership losses (reportable to a partner on a schedule K-1) may not exceed the adjusted basis of the partnership interest. The basis is generally the original capital paid, plus accumulated taxed earnings that have not been withdrawn, less withdrawals.
Partners are subject to the at-risk loss limitation and the passive activity loss limitation rules.
The at-risk limit affects the amount of the loss to the portion that that partner is personally liable for. Generally a passive loss is limited to either passive income or up tp $25,000 if there is active participation in a rental real estate activity.
There is no easy way to explain these rules. Please contact a local CPA to determine the deductibility of the loss reported on Schedule K-1. This area of the tax code is quite complex and confusing to many.

Generally not. Interest income is defined as portfolio income, not passive income. Portfolio income includes interest, dividends, and gains on the sale of investment property. Passive K-1 losses can only be used to offset other passive income, except when the $25,000 special loss allowance for persons with active participation in rental real estate entities can be utilized.

Sporting event tickets are considered an entertainment expenses, if you accompany them. The deduction for a business gift is limited to $25 per person per year. Generally, the amount allowable as a deduction for meals and entertainment expenses is limited to 50% of such expenses.

In an S corporation, only the salary paid to the employee-owner is subject to employment tax.
The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings.
A major factor that differentiates an S corporation from an LLC is the employment tax that is paid on earnings.
The owner of an LLC is considered to be self-employed and, as such, must pay a “self-employment tax” of 12.3% which goes toward social security and Medicare. The entire net income of the business is also subject to self-employment tax.

A S corporation has no flexibility in how profits are split up amongst its owners.
The profits must be distributed according to the ratio of stock ownership, even if the owners may otherwise feel it is more equitable to distribute the profits differently.