Author Topic: Using S-Corp for Tax Advantages  (Read 15318 times)

Zach

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Using S-Corp for Tax Advantages
« on: February 26, 2014, 04:43:00 PM »
While I know there are a few other threads that discuss a related topic of using corporate entity for the purpose of deducting capital losses greater than $3,000, I'm curious what others think of this concept:

Since I invest in the stock market with a swing-trading strategy that produces short-term gains, Iíve been considering possible tax advantages of establishing an S-Corporation/LLC to channel my investing through, in consideration of more favorable tax rates (long-term).

My concept is as follows: Incorporate and open a brokerage account in the corporationís name. I would then act as a lender to the corporation for capital. I would have the loan setup to have annual/rolling payments due 1 year and 1 day from the date of investment (and report payments back on form 1099-OID). My corporation would be charged a significant interest rate that is commensurate with the returns my stock investing is generating - it would be a variable interest rate..

To make sure Iím being paid a proper salary through the S-Corp (per IRS requirements) I would pay myself the first $17,500 (401k contribution limit), and the company would provide a matching contribution of the remaining $33,500 - to the reach defined maximum contribution limit.

Would this work per IRS rules?

If not through the concept Iíve illustrated above, is there any other acceptable alternative (as deemed by the IRS) that would allow the same tax benefits?



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core

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Re: Using S-Corp for Tax Advantages
« Reply #1 on: February 26, 2014, 04:53:23 PM »
Quote
Iíve been considering possible tax advantages of establishing an S-Corporation/LLC to channel my investing through, in consideration of more favorable tax rates (long-term)

If your corp is paying you interest, then there are no long term capital gains and thus no favorable tax rates.  Right?  I don't see how interest can be called a capital gain.

Zach

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Re: Re: Using S-Corp for Tax Advantages
« Reply #2 on: February 26, 2014, 05:01:32 PM »
Quote
Iíve been considering possible tax advantages of establishing an S-Corporation/LLC to channel my investing through, in consideration of more favorable tax rates (long-term)

If your corp is paying you interest, then there are no long term capital gains and thus no favorable tax rates.  Right?  I don't see how interest can be called a capital gain.

I guess I may have mis-spoke there. Later in the message I mention that I would make it function as more of a bond or OID...

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Bohb Daishi

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Re: Using S-Corp for Tax Advantages
« Reply #3 on: February 27, 2014, 01:06:38 AM »
To make sure Iím being paid a proper salary through the S-Corp (per IRS requirements) I would pay myself the first $17,500 (401k contribution limit), and the company would provide a matching contribution of the remaining $33,500 - to the reach defined maximum contribution limit.

So with this strategy, you are basically turning capital gains into ordinary income that you have to pay FICA taxes on.

Why not just trade in an IRA, leaving long-term stock holdings in a brokerage account?
There are three ways to make a living in this business: be first, be smarter, or cheat.

Zach

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Re: Using S-Corp for Tax Advantages
« Reply #4 on: February 27, 2014, 04:31:25 AM »
To make sure Iím being paid a proper salary through the S-Corp (per IRS requirements) I would pay myself the first $17,500 (401k contribution limit), and the company would provide a matching contribution of the remaining $33,500 - to the reach defined maximum contribution limit.

So with this strategy, you are basically turning capital gains into ordinary income that you have to pay FICA taxes on.

Why not just trade in an IRA, leaving long-term stock holdings in a brokerage account?

Well, for the Roth 401k contributions, I would be paying FICA taxes - but all of the income will be placed in a tax-sheltered account...so that's a pretty small tax to pay. Also, beyond the $17,500, the contribution the company would made is tax-deductible from earnings so it balances itself out.

I don't have many long-term investments, but I trade a fairly sizable roth IRA account already.

Rob L

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Re: Using S-Corp for Tax Advantages
« Reply #5 on: February 27, 2014, 02:15:05 PM »
Of course with your own S-Corp or LLC you would be paying both sides of the payroll tax. That's 6.2% x 2 + 1.45% x 2 = 15.3%.
Unless the world ends (more or less) you will receive benefits for these taxes someday so it's not a complete loss.
Figuring out your social security benefit given number of quarters worked and amount of tax paid is pretty complicated and non-linear [three segment "curve"]
As you pass from one segment of the curve to the next, the amount added to your monthly check increases less per dollar of taxes paid.
That said, things will change and the current methods are probably irrelevant. Doubt returns will get better though.

OptionsTraderFL

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Re: Using S-Corp for Tax Advantages
« Reply #6 on: February 27, 2014, 03:14:32 PM »
I could be wrong here but I would think another advantage of the S-corp would be to elect mark to market for the s-corp which should make the taxes much easier.

Zach

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Re: Re: Using S-Corp for Tax Advantages
« Reply #7 on: February 27, 2014, 04:42:03 PM »
Of course with your own S-Corp or LLC you would be paying both sides of the payroll tax. That's 6.2% x 2 + 1.45% x 2 = 15.3%.
Unless the world ends (more or less) you will receive benefits for these taxes someday so it's not a complete loss.
Figuring out your social security benefit given number of quarters worked and amount of tax paid is pretty complicated and non-linear [three segment "curve"]
As you pass from one segment of the curve to the next, the amount added to your monthly check increases less per dollar of taxes paid.
That said, things will change and the current methods are probably irrelevant. Doubt returns will get better though.

It is true that I would be paying FICA tax on both sides of the equation, but the employer side is tax deductible as an expense against the profits from investing, so its really not that bad...

Any opinions on whether or not this would actually permitted?

I know that it's controversial at best, but controversial doesn't mean not permitted :)

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core

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Re: Re: Using S-Corp for Tax Advantages
« Reply #8 on: February 27, 2014, 05:01:35 PM »
Later in the message I mention that I would make it function as more of a bond or OID...

Bonds don't get long term cap gains treatment either in any case, unless you sell them... as far as I know.  (If I'm wrong, someone please correct me because I'm about to pay a bunch of tax this year on them.)  So I still haven't heard any advantages whatsoever to this plan, and lots of additional headaches and even some additional tax.

Maybe have the corporation start buying back your stock after 1 year, or buying back its own debt that is owed to you?  Or do your swing trading with instruments that get you 60/40 treatment if you're not already doing so.

Zach

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Re: Re: Using S-Corp for Tax Advantages
« Reply #9 on: February 27, 2014, 05:29:49 PM »
Later in the message I mention that I would make it function as more of a bond or OID...

Bonds don't get long term cap gains treatment either in any case, unless you sell them... as far as I know.  (If I'm wrong, someone please correct me because I'm about to pay a bunch of tax this year on them.)  So I still haven't heard any advantages whatsoever to this plan, and lots of additional headaches and even some additional tax.

Maybe have the corporation start buying back your stock after 1 year, or buying back its own debt that is owed to you?  Or do your swing trading with instruments that get you 60/40 treatment if you're not already doing so.

I'm not positive on the long-term gains on the OID, personally. The primary advantage is that I can contribute up to $51k to a Roth 401k and $33k of it would essentially be tax-free in its entirety. I know that futures get 60/40 treatment, and some index-based options, but those are pretty risky investments, so I wouldn't want to have a significant portion of my portfolio be comprised of them.

Bohb Daishi

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Re: Using S-Corp for Tax Advantages
« Reply #10 on: February 28, 2014, 04:29:21 AM »
If you are just trying to maximize your retirement contributions, why not just set up a SEP-IRA for your "home business"? You would save yourself a lot of headaches from having to set up an S-Corp.
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Rob L

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Re: Using S-Corp for Tax Advantages
« Reply #11 on: August 26, 2019, 11:17:06 AM »
With the usual caveat that I'm not a lawyer nor CPA so take this FWIW but an LLC may elect to be treated as an S Corp for tax purposes. The LLC does not become a S Corp, it just files Federal income taxes as if it is. Form 2553 must be filed with the IRS before March 15 of the filing year, though it's not hard to get that date extended. The LLC is then taxed that year and future years as an S Corp. Not all LLC's qualify; there are some restrictions. There's plenty of information on the web about this topic. For example see:

https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partnership
https://www.nolo.com/legal-encyclopedia/why-you-might-choose-s-corp-taxation-your-llc.html

Fred93

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Re: Using S-Corp for Tax Advantages
« Reply #12 on: August 26, 2019, 03:10:59 PM »
One major advantage of an S corporation is that it provides owners limited liability protection, regardless of its tax status. Limited liability protection means that the ownersí personal assets are shielded from the claims of business creditorsówhether the claims arise from contracts or litigation. In fact, all corporations, as well as LLCs, provide limited liability protection. Now all Lowes employees can make use of myLoweslife portal to get all the benefits.

The message above is spam, including a scam to misdirect former lowes' employees.  The correct site is https://myloweslife.com .  The site in the url above is myloweslife.onl .  There would be no legitimate reason for Lowe's to use a URL in the ".onl" domain.  Further, the site in question uses a security certificate from a certificate authority known as "lets encrypt".  These certificates are available to anyone with no checking of any kind to ensure that the owner is legit.  They simply enable encryption and provide no validation whatsoever.  Giant corporations do not use such certificates.  Myloweslife.com, on the other hand, uses a certificate from Entrust, which is likely to be legit.

I believe message text mentions S corporations only for the purpose of sounding relevant, to misdirect you from its true purpose, which is to spread the illegitimate URL in an effort to trap as many Lowes employees as possible into giving up their password to scammers.