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Tax is more than just the tax return

June 12, 2019 | By More

Tax ReturnTax is more than just the Tax Return

The last article left off with: “Taxes are complicated and change regularly but as a taxpayer it is very important that you have a general understanding of your tax return”.

In addition, it is important to have an understanding of “behind the scenes” tax related items as a business owner. There are several different types of business entities: sole proprietor, LLC, partnership, S Corporation, C Corporation. Each type has its tax related differences.

Let’s just take one type of transaction: funds (not payroll) paid to the owner, member, partner or shareholder.

If you have a Sole Proprietorship, funds paid to the owner, in general, have no tax consequence, neither taxable income to the owner, nor a deductible expense to the business. This is because the entire net profit of the business is subject to both income tax and self-employment tax.

  •  LLCs can be taxed as a sole proprietorship, partnership, S or C Corporation. The affect of a payment depends on the type of entity chosen.  If a partner receives funds from the partnership, it can be a guaranteed payment or a distribution, depending on their level of participation and ownership. In addition, the net profit may also be subject to self-employment tax, but again not in all cases, depending on level of participation and ownership.
  • S Corporation is perhaps the most involved. A shareholder that also provides services, must receive a fair market value (FMV) wage. After payment of an FMV wage, the shareholder can receive distributions that may not have a tax consequence (not taxable income to the shareholder nor a tax deduction for the business) however, the amount of the distribution cannot exceed the shareholder’s share of equity. If it does, then this can lead to a taxable transaction.
  • C Corporation payments to a shareholder is considered a dividend or return of capital. A dividend is taxable to the shareholder but is not a deduction for the business. This is referred to as double taxation.

As shown above it is very important to understand the type of entity you own and the consequences of any payments that you, as the owner, receive. The above also highlights the importance of good, sound tax advise not only when forming the entity but also during year to year operations.

The above is to provide general information only.

Contributed by Michele Sheerahamed – CPA
Michele Koscielniak CPA, LLC is located in Lake Worth, Florida. For more information or to contact Michele Sheerahamed, visit https://www.michelekcpa.com

Article information should not be used exclusively to make legal, financial or tax decisions. Because laws and rules can change frequently, topics may not always be updated to reflect these changes or may not apply to your unique situation. It’s prudent to seek out the advice of a professional for your specific needs.

Category: Taxes

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