Question

Compare and contrast both tax and non-tax issues facing a sole proprietorship vs a an S-corp.

Answer 1

1. Sole proprietorship's tax and non-tax issues:

i) For the purpose of tax, the individual and the business are considered the same.

ii) They do not pay taxes or do not require to file any returns but must report the profit or or loss on personal tax return.

iii) They are eligible for 20% deduction of taxes through Job Acts and Tax Cuts.

iv) They have to pay self-employment taxes like Social Security and Medical Taxes. on self-employment income.

v) This is reported under Form 1040 to Schedule C, personal income tax return form.

2. S-Corporation's tax and non-tax issues:

i) The reason these S-Corporations are formed is because of their tax benefits as is it a Pass-Through Entity.

ii) The tax purpose of this corporation slightly differs from that of Sole Proprietorship's as profits and losses pass through the owners' personal tax return.

iii) They are also eligible for 20% pass-through tax deduction under Tax Cuts and Job Acts.

iv) The larger the share of the dividend, the lesser tax you will have to pay for Social Security and Medical Taxes.

v) This is reported under Form 1120, the corporate tax return form