daycare 02:52 PM 08-31-2012
I am having to go through all of the fun tax stuff right now from last years taxes and my CPA asked me why I have not filed to become an SCORP???
She was saying that I could pay myself a low salary and then file a high distributions?? I am so lost on this...
Why would a home daycare benefit from this or would it?? Help???
TomCopeland 03:07 PM 08-31-2012
Not a simple answer. If you become an SCorp it's possible that you could reduce your taxes in this way. The corporation would pay you a salary and be able to deduct the payroll costs as a business expense. Second, you could have the profit given to you in two ways: one through wages (where you owe the same taxes as if you were self-employed) and the other through dividends. Dividends are taxed at a lower rate, so you can save some taxes.
However - an S Corp must pay federal and state unemployment taxes on your wages and you may be required to purchase workers compensation insurance. Also, you will lose the ability to depreciate your home. This can add up! I've been told that you won't start saving any money on your taxes unless you can show a consistent profit year after year of at least $30,000.
Have your CPA show you exactly how you would save money by being an SCorp using numbers for your business. Does he realize you lose your house depreciation and have extra payroll expenses as an S Corp?
daycare 08:47 AM 09-07-2012
Originally Posted by TomCopeland:
Not a simple answer. If you become an SCorp it's possible that you could reduce your taxes in this way. The corporation would pay you a salary and be able to deduct the payroll costs as a business expense. Second, you could have the profit given to you in two ways: one through wages (where you owe the same taxes as if you were self-employed) and the other through dividends. Dividends are taxed at a lower rate, so you can save some taxes.
However - an S Corp must pay federal and state unemployment taxes on your wages and you may be required to purchase workers compensation insurance. Also, you will lose the ability to depreciate your home. This can add up! I've been told that you won't start saving any money on your taxes unless you can show a consistent profit year after year of at least $30,000.
Have your CPA show you exactly how you would save money by being an SCorp using numbers for your business. Does he realize you lose your house depreciation and have extra payroll expenses as an S Corp?
So the house that i live in I am renting, would that still have the same issue of not being able to claim the monthly % of rent??. I own two houses, but I rent those out.
Also, I already have workers comp. because I have an employee and I live in CA.
I did talk to my CPA about it, but they are still telling me to do it...lol
TomCopeland 10:36 AM 09-07-2012
Here's what happens when you are renting your home:
If you are a sole proprietor, you can deduct the time-space % of your rent as a business expense.
If you are an S Corporation you can have the corporation pay you rent for using your home for the business. The corporation can then deduct the rent as a business expense. However, the amount of rent the corporation pays must be based on the fair market value of renting out your home. It's not based on your time-space %. So, it's very likely that the amount of rent the corporation could deduct will be less than what you can deduct as a sole proprietor.
Next - you must report the rent paid by the corporation as income on Schedule E. You can claim some house expenses on Schedule E, that may or may not equal the amount of the corporate rent.
What I'm saying is that this is not automatically a better deal, tax-wise, to form a corporation. It's possible you might come out okay tax wise when you rent your home, but you might not. You need your CPA to show you exactly what would be the amount of rent the corporation would pay you and how that would affect your taxes.