Advanced Entities and Taxes. A Case Study Growing from Your W-2 Job to Multi-Business Ownership

Transcription

1 Advanced Entities and Taxes A Case Study Growing from Your W-2 Job to Multi-Business Ownership

2 Advanced Entities and Taxes A Case Study Growing from Your W-2 Job to Multi-Business Ownership

3 Part 1 Question 1. Should John be a sole proprietor? If not, what entity, what tax election, and who should own it? Facts John s W-2 Income is $132,000 He Lives in California His business will have a profit of $3,000 per month

4 Three Types of Income Earned Income Portfolio Income Passive Income Business W-2 Job Trading time for money Paper assets Interest Dividends Capital Gains Rental real estate Oil and gas Other peoples businesses

5 The Highest Taxed Income Ordinary Tax Rate Earned Income + Self-Employment Tax

6 What is Self-Employment Tax?

7 Self-Employment Tax Social Security Tax + Medicare Tax TIMES Two 15.29% 15.29% on the first $106,000 (for 2009) Anything over $106,000 is taxed at 3%

8 When Not To Use an S Corp If you have a W-2 job that pays you at least $70 - $80 K per year If you will have less than $40,000 in profits. In California and New Jersey less than $55,000

9 Part 1 Question Should John be a sole proprietor? If not, what entity, what tax election, and who should own it?

10 Part 2 Question 1. Should John change the tax election for his LLC? 2. How should John Pay Himself 3. What kind of system does John need to reimburse expenses. Facts John s left his W-2 job His business will have a profit of $12,000 per month

11 S Corporations Are A Pass- Through Entity $$ Gross Income $$ Expenses $$ Profit $$

12 Earned Income S Corporation Distributions W-2

13 Two Biggest Mistakes We See First People taking distributions without taking any payroll. Second People paying themselves payroll but the S corporation has a loss

14 Case Study Part 3 Scenario By spring of the following year, John has been very successful in building his consulting business. Mary decides to leave her W2 job and start her own medical spa. She expects to earn $15,000 a month after expenses, including the purchase of equipment. John has been approached with 2 new opportunities: 1) one of his independent contractors would like to become a partner 2) he thinks he can turn his hobby of skydiving into a business by taking business professionals skydiving as a character building event. He expects to earn $5,000 a month after expenses. John and Mary also decide to begin investing in buy & hold real estate and set up a wealth account to save.

15 Case Study Part 3 Questions 1. What type of entity and tax election does Mary need for the med spa? 2. Should John give his friend, the independent contractor, a piece of the business? If yes, under what conditions? If no, why not? 3. What type of entity should John put his skydiving business into and how should it be owned? 4. What tax considerations do they have for their real estate investments?

16 Part 4 Question 1. Does John qualify as a real estate professional? Does he care? Facts John finds he has spent more hours in real estate than he has in either his IT business or his skydiving business.

17 Rental Real Estate Passive Activity Exceptions Active Participation Real Estate Professional

18 Rental Real Estate Real Estate Professional Time Test 750 hrs Materially Participating No Income Limitation No Loss Restriction Time Log is required

19 Real Estate Professional Status Qualified Real Estate Activities Develop Redevelop Construct Reconstruct Convert Operate Acquire Rent Manage Lease Sell

20 Case Study Part 5 Questions 1. How can they restructure to lower their taxes and give them additional benefits?

21 C Corporations And Now for Something Completely Different

22 C Corporations The Benefits of Corporations 1. Lower Tax Rates The first $50,000 of taxable income is taxed at 15% 2. Employee Benefits Medical Expense Reimbursement Plan MERP 3. Fiscal Year End

23 Getting Money Into The C Corporation Contract for services with your other businesses Property Management Marketing Out Sourced Services Paying for those services will be a deduction to the other business and income to the C Corporation.

24 Getting Money Out of the C Corporation Three Ways To Get Money Out 1.Pay a salary 2.Pay a Dividend (Distribution) 3.Loan Best way. Loans should be for investments and must be paid back including interest.

25 When Is A C Corporation Needed 1. Tax bracket of 25% or more and 2. Extra cash to be used for investing OR Special circumstances 1. High Medical Expenses 2. Need Short Term Reduction of Income

26 Contact Information Your Entity Solution, LLC Taryle and Associates, CPAs, PLLC Special Website