Chronicles of Tax Advisors
A client came to Tax Advisors in early March with the financial results of his business for 2014. His business revenue had more than doubled from the prior year. In reviewing his total tax picture, we advised that he exercise the Subchapter S Corporation election. We worked at an extreme level of efficiency to file his 1120S (Sub S return) by March15, 2015, which included a Form-2553 election that allowed him the Sub S treatment for all of 2014. Thanks to our efforts, his tax savings amounted to approximately $10,000.
Amazed by the tax-saving effect of S Corporation election, this client referred a relative with a similar issue. This was a wise decision because the relative's business had also experienced substantial growth in 2014 compared to 2013. Upon his agreement to the election, we again hustled the preparation of his return and completed it by the March 15 deadline. In total, we saved the relative approximately $20,000 in taxes.
In conclusion, S Corporation election can produce substantially better tax outcomes than sole proprietorship treatment. One of the advantages of conducting business as a Subchapter S Corporation is the reduction of self-employment taxes, which are social security taxes paid on the profits of a sole proprietorship. An S corporation does not pay self-employment taxes on profits, whereas a sole proprietor does. Thus, the tax savings can be substantial, as in the two cases above.
Whenever there is growth in a sole proprietorship, a Subchapter S election should be considered. We can readily provide clients with a calculated tax liability comparison between the two methods to assist them in making an informed decision.
Dave Motes, CPA
Authorized to practice before the Internal Revenue Service
A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals.