by admin on September 1, 2010
The government wants to grab your 401K and IRA money. Discussing the pros and cons about converting to a ROTH IRA in a May 2010 post I warned you of the possibility. In that post I said:
“One caveat though. The government has kicked around the idea of either requiring retirement accounts to hold a certain percentage of government bonds (whether you want to or not), or even in some more extreme economic and political scenarios, requiring the conversion of your retirement accounts completely to government retirement bonds (think enhanced Social Security).”
Two new developments on that front that you need to know about: the required use of Treasuries in your retirement account and the forcing of employers to provide retirement plans.
Just like the health care bill was forced upon strapped small businesses, we find John Kerry introduced legislation in August to requiring employers of 10 or more people to provide what he terms “automatic IRAs.” For those companies that can’t afford or choose not to have a retirement plan, too bad. Kerry demands that you create “automatic IRAs” for your employees and fund it.
It gets better though. Hearings are scheduled for September 14th and 15th with the Department of the Treasury to see if they can require retirement funds to hold a percentage of government securities in their investment portfolio. Just what you wanted to do right, be forced to buy US Treasuries? If the government can’t convince foreign governments to buy the debt being created to cover the huge deficits, they’ll just force you to buy them.
Whether this happens now or later you can bet it’s only a matter of time. We don’t know how this round of hearings will turn out, but it would be a good idea to contact your Congressmen and let them know what you think of these plans. Small business has enough problems getting through this economic downturn without more highly burdensome regulations being dumped on us.
Also as you think about what to do with your 401K or IRA, go back and read my post from May on converting to a ROTH or simply withdrawing your retirement dollars in 2010. That along with this post ought to help you make an informed decision.
by admin on August 26, 2010
S corporations can often reduce your taxes when used for operating businesses. Here are some ideas on how to do so. In my examples I assume your business has always been an S corporation as there are other implications if it was once a C corporation.
You may be taking money out of your S corporation in several ways including a salary, rental payments from leasing real estate to the corporation, and distributions of some of the S corporation’s net income. Even minor changes in these payment categories can generate differing tax results.
Income Shifting. S corporation shareholders often attempt to minimize their salary to increase the pass-through income flowing to other owners, such as their children. Clearly, an owner rendering significant services to the corporation cannot unreasonably reduce salary to increase income to other shareholders. However, reasonable adjustments may be made with this goal in mind.
Reducing Compensation. Wages paid to an S corporation shareholder-employee are subject to payroll taxes. However, S corporation income is not. Thus, shareholder-employees may be able to reduce their payroll tax liability by minimizing salaries to increase pass-through income.
The IRS watches this closely and has cracked down on those owners who take completely unsupportable positions, like no salary at all. However, as long as you stay in the lower end of a reasonable range for your salary, you should be okay. You must be paid for the services you actually render to the corporation.
Generating Rental Income. It is generally beneficial for an owner with rental real estate to lease it to their S corporation. Any resulting net rental income is exempt from payroll taxes. But again, the arrangement must be reasonable as the IRS has the authority to characterize rent payments as compensation to the extent the rent exceeds market rates. S corporation shareholders using a portion of their home for the corporation to work from or to store corporate inventory may lease space to the corporation. The benefit is the rent is exempt from payroll taxes.
The Benefit To You. S corporation shareholders can often choose how to structure funds being paid to themselves from their corporation. While compensation and rental amounts must be reasonable, shareholders’ tax savings can be substantial. These strategies should be reviewed with your CPA as there are many more opportunities and pitfalls.
If you are operating your business as a sole proprietorship or an LLC you may want to consider switching to an S corporation to take advantage of these opportunities.
Your CPA can help you chart a tax savings course. So what are you waiting for? Get going!
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