Question

S Corporation. What are the benefits of an S Corporation versus a LLC? What happens when an S Corp. is involuntarily converted to a regular corporation? 2.Corporation Formation. What are the basic tax rules for the formation of a corporation? 3.Alternative Minimum Tax. What are the tax issues associated with the repeal of the alternative minimum tax (AMT)?

Answer 1

1. Differences between scorp & LLC:

• Scorp have directors & officers which can oversee the corporate affairs & handle major decisions. Directors can elect officers who would manage the daily business affairs.
• Scorp stock is also freely transferable whereas an LLC membership is not freely transferable & also requires approval from the members.
• Scorp shareholders receive their share of profits & losses based on their ownership percentage but LLC‘s allocate on any basis they want.

2. When a scorp is involuntarily converted to a corporation then it will have to start paying taxes from the date of conversion. Distribution of dividends will be taxed at the shareholders level which can result in double taxation. But the double tax pain is somewhat reduced because federal tax rate on dividends is only 15%.

Similarly, if the corporation has losses, they are carried forward in order to offset the corporation’s future income for its tax purpose.

With a scorp, the income flows & is taxed at the personal level. Losses which flow through can reduce the tax payer’s income from other sources.

3. Basic tax rules for corporation formation:

In forming a corporation, the shareholders exchange various things like money, property etc. for the capital stock of the corporation. A corporation would take special deductions. For the purpose of federal taxes the c corporation is considered as a separate taxpaying entity

The profit of the corporation is taxed when it is earned & is taxed to the shareholders when distributed as dividend. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Forms 1120 and 1120S for tax years ending on or after December 31, 2007.

4. Tax issues:

Because of the repeal of the AMT, separate returns would be costlier than a joint return if one spouse makes substantially more than the other

The second change is that the pace of phase out can reduce the exemption as the income becomes larger.

The AMT would also impact the tax payers especially those at the lower income levels as it would also reduce the deductions in the regular return.