S-Corp Answers

You've got S-Corp questions. I've got S-Corp answers.

Danny Nelson, EA

If you don't see answers to your questions below, please email your question to danny@stewardshipos.com or Schedule A Free Conversation with me.

Q: What is an S-Corp?

A: 

Q: How do S-Corps reduce my taxes?
Q: What's the catch?

A: 

Q: How do I get my business to be an S-Corp?
A: You make an election!

Click here to get an S-Corp Analysis

Q: What is "Reasonable Compensation"?

A:

Q: How do you calculate "Reasonable Compensation"?
Q: How does electing "S" status affect my "Qualified Business Income Deduction"?
A: It changes it.

For a refresher on what the QBID is, please see the question directly below this one.

When comparing a Schedule C business to an S-Corp “apples to apples” the QBID is generally lower for S-Corp shareholders than for Schedule C sole proprietors. This is because the owner/employee wage deduction in an S-Corp reduces the business income that is eligible to be used for calculating the QBID.

The QBID is currently set to expire after the 2025 tax year unless Congress acts to extend it.

The QBID is a factor that many accountants ignore when analyzing the benefits of an S-Corp election. This is because they didn't have to consider it before 2018 when it was created and they this that it won't make that much of a difference anyway. This is a costly mistake. I have seen scenarios where the QBID has a significant effect on the S-Corp tax savings and was a deciding factor in deciding whether or not to make the election.

Needless to say, I take the QBID into account when doing an S-Corp Analysis.

Click here to get an S-Corp Analysis

Q: What is a "Qualified Business Income Deduction" (aka QBID)?

A: In simple terms, the QBID is a deduction taken by business owners on their personal tax return that is calculated by multiplying business income by 20% (subject to limitations, of course).

So, if your Schedule C net income is $100,000, your tentative QBID would be $20,000. One of the limitations is that the QBID can't exceed 20% of taxable income without regard to the QBID. Unless there is significant other income, taxable income would be less than buisness income and so QBID in this case would be less than $20,000. 

QBID limitations must also be taken into account when doing an S-Corp Anlysis. I do that. 

Q: How can I know if an S-Corp election will ACTUALLY reduce my taxes?
A: Your particular situation must be analyzed as though your business were an S-Corp. Then the results of that analysis must be compared to the results of your current situation.

How do you do that?

Here it is broken down into X steps:

1. Do a reasonable compensation calculation for all owner/employees.

2. Run a tax return scenario where your Schedule C sole proprietor income is S-Corp pass-through income (reduced by your reasonable compensation) and your wages are increased by your reasonable compensation.

3. Review the QBID to make sure it is being calculated correctly and that limitations are properly applied.

4. Compare the Federal and State tax results to see if there are tax savings from the S-Corp.

5. Reduce those tax savings by additional compliance costs of electing to become an S-Corp (cost of the S-Corp tax return, annual reasonable compensation calculation, AND the marginal cost of adding an employee to your payroll–this will be higher if you don't have a payroll system in place at all).

For most business owners, this task is oursourced to their accountant. It doesn't mean you can't do it, but it might save you some time and angst.

I have an S-Corp Analysis service where I do all of this for you.

Click here to get an S-Corp Analysis

Q: What is an owner/employee (aka shareholder employee)?
Q: What are the additional costs of becoming an S-Corp?

A:

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