Free Fringe Benefits For Pass-Through Entity Owners

Pass-Through Entities which include Partnerships, limited liability companies (LLCs) treated as partnerships, and S corporations have distinct tax and non-tax advantages.

The facts are that business owners considering these forms of business ought to know that fewer tax-free and tax-favored fringe benefits are available to owners of passthroughs than to shareholder-employees of C corporations. This commentary evaluates which fringe benefits can be made available to the owners of these companies.

Working condition fringe benefits

Property or services supplied by an employer to an employee are tax-free working condition fringe benefits (WCFBs) if the employee would be entitled to a business expense deduction is he/she paid for it.

Thus, owners may receive the following WCFBs tax-free:

• Business-related use of a company auto, if properly substantiated. The personal-use value of the auto must, however, be treated as compensation income.

• The business-use portion of company paid country club dues, even though the dues are completely nondeductible.

• Job-related education expenses paid by the firm.

• The use of a cell phone provided to an employee primarily for non-compensatory business reasons.

De minimis fringe benefits

“De minimis fringe” is the value of a property or service of which is so small as to make accounting for it unreasonable or administratively impracticable. For purposes of the tax-free de minimis fringe benefit rules, “employees” include any recipient of a fringe benefit. So partners are entitled to get tax-free supper or supper money or local transportation fare if provided on an occasional basis in connection with overtime work.

Other de minimis fringes include:

• Traditional birthday or holiday gifts of property (not cash) with a low fair market value.
• Occasional theater or sporting event tickets, and fruit, books, or similar property provided under special circumstances (e.g., on account of illness, outstanding performance, or family crisis)
• Traditional awards (such as a gold watch) upon retirement after lengthy service.
• Personal use of a cell phone provided primarily for non-compensatory business reasons.

For more advice concerning the benefits Owners of Pass-Throughs can claim please contact Peter Rudolph,CPA 954 596 1120

Limited Liability Companies – 4 Things to Consider When Preparing For Tax Time

Choosing the right business’s structure should be based on your particular needs. When creating an LLC, generally there are have four basic entity types you can choose from. Learn some of the advantages and disadvantages of each.
These are the four potential options. The company has four potential business forms to operate under.
• As a sole proprietorship
• As a partnership
• As a C corporation
• As an S corporation
For taxes the LLC is a pass-through entity in three of the four options above. A pass-through entity pay income taxes at the owner level. The C Corporation pays taxes at the Company Level and at the Owner Level.
Sole Proprietorship
When there is only one member in the company, the LLC is treated as a “sole proprietorship” for tax purposes, and an individual owner would report the LLC’s income or loss on Schedule C of his or her individual tax return.

One advantage of this type of entity is the return is easy to prepare. A sole proprietor reports profit/loss on a relatively simple Schedule C. This permits the owner to organize the traditional (shoebox) listing of revenue and expenses.

One disadvantage of this type of entity is the earnings from a sole proprietorship are subject to self-employment taxes, which are currently 13.3% on the first $106,800 of income. With a corporation, only salaries (and not profits) are subject to such taxes.

Partnership

When there are more two members in the company, the default tax status for LLCs with multiple members is as a partnership. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member’s distributive share of the LLC’s income or loss that is then reported on the member’s individual income tax return.

An advantage of this type of entity is the options of splitting up profits and losses for the owners. Different from corporations, where earnings are divided based on each owner’s respective equity percentage, partnerships allow owners to figure the split however they want as long as they all agree to it in writing. So, for example, a partner who has a 50 percent equity stake in the business could get 25 percent of the profits and 60 percent of the losses.

A disadvantage of this entity is the earnings from a partnership are subject to self-employment taxes, which are currently 13.3% on the first $106,800 of income. With a corporation, only salaries (and not profits) are subject to such taxes.

C Corporation

To be taxed as a Corporation the LLC needs to choose to be taxed as a Corporation. Form 8832 is used for this purpose.

One advantage of the C Corporation type of entity is the availability of more fringe benefits. This type of entity offer the owners of the business better fringe benefit options.

One disadvantage of the C Corporation is that corporate profits will be subject to “double taxation”, first as corporate income and second as income to the ultimate recipient. For example, if a corporation issues dividends from its profits, it has already paid income tax on that money, but the dividends remain taxable as income to the shareholders.

S Corporation

To be taxed as a S Corporation the LLC needs to two things. First, choose to be taxed as a Corporation, Form 8832 is used for this purpose. Second, make a Small Business Election, Form 2553 is used for this purpose.

An advantage of the S Corporation is that like the LLC it receives pass through taxation. Pass through taxation simply means no federal income tax at the company level; the owners only pay tax rate at the individual level.

A disadvantage of the S Corporation are the ownership limits. In an S corporation, for example, all the owners (shareholders) need to be U.S. citizens or permanent residents. The number of owners is limited to 100 persons. Families, however, can often be counted as a single shareholder for purposes of the not-more-than-100-shareholders. The S corporation may have only one “class” of stock; no preferred stock, for example.

The following information is not intended to replace the services of a professional. Please consult a CPA or an Attorney who can better understand your particular circumstances. Trying to set up and/or operate a corporation of any kind without competent professional guidance is asking for serious trouble. Please contact us.

CPA Deerfield Beach