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What Enrolled Agents Need to Know – Sizing Up the S Corp Election

Now that more individuals are contemplating opening a business than just five years ago, enrolled agents and any other registered tax return preparer who wish to capitalize on this trend, by courting small businesses as clients, should brush up on the tax advantages of the S Corp election. As one of the most popular business entity types, the S Corp election is a subject covered on the EA examination and dealt with on an ongoing basis through tax CPE, enrolled agent continuing education courses. However, it is important from time-to-time to recap the fundamentals of S Corps, particularly the tax advantages of this election.

Tax Advantages There are three fundamental tax advantages of becoming an S-Corp. All three advantages stem from its status as a "pass-through" entity: meaning, items of income or loss, deductions, and credits are passed through directly to a corporation's shareholders on a pro-rata basis on par with their ownership percentages. The most significant benefit of this pass-through approach is the ability to avoid double taxation: that is, taxes on corporate profits and taxes imposed at the individual shareholders level on those profits as dividends.

To deduct such contributions, enrolled agents should complete Form 1040 and itemize deductions on Schedule A. When taxpayers receive some sort of benefit because of a contribution - like box seats at the World Series - the amount of the charitable deduction must be minus the amount of the benefit received.

The amount of deduction for stocks, non-cash donations or other non-cash property is usually the fair market value on the date of the donation. Items such as clothing and household goods must generally be in good used condition to qualify as deductible, although special rules apply to vehicle donations.

So you're probably wondering what someone like you might do to keep the IRS from knocking on your door, asking for all your receipts. Forbes Investopedia has a list of 10 things that will trigger a red flag or audit: 1. Large Charitable Deductions 2. Large Business Expenses 3. Inaccurate W-2 or 1099 Reporting 4. Excessive Itemized Deductions 5. Concealment of Cash Receipts 6. Tax-Shelter Losses 7. Informant reporting you to the IRS 8. Prior Tax Problems or Audits 9. Complex Business Transactions 10. Complex Investment Transactions

Contributions of cash or property of $250 or more operate in much the same manner. The same rules apply for maintaining bank records and deductions for payroll, as does the requirement of written proof from the charitable organization listing the amount of the cash, a description of any donated property, and any goods or services exchanged. According to the IRS, a single document is often good enough to fulfill these various requirements. In the event that the total deduction for all non-cash contributions for the year exceeds $500, taxpayers are required to complete and attach IRS Form 8283, "Non-cash Charitable Contributions," to the federal income tax returns.

Internal Revenue Code (IRC) 1361(b)(1)(C) renders nonresident aliens ineligible as shareholders of an S corporation, and also precludes foreign trusts from setting up as S corporation shareholders. Below are trust types the IRS permits to be S corporation shareholders: * Trusts owned by a U.S. citizen or individual under the grantor trust rules (IRC 671-679). * Trusts transferred through a will (but only for the two-year period from the date the transfer) * Voting trusts * Qualified Subchapter S Trust (QSST). * Electing Small Business Trusts (ESBT). * Estates. * Exempt organizations, as described in 401(a) and 501(c)(3).

IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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