Discussion:Pick-A-Brain
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Discussion Forum Index --> Tax Questions --> Pick-A-Brain
| 14 April 2006 | |
| I opened a thread the other day about a new client whose quickbooks is in a mess and I will be setting it up as best as I can. The prior CPA recorded escrow funds as income and expenses on the escrow as COGS. This is NOT the clients monies, but escrow funds in accounts for the customers themselves to fund building of new homes. I will report these expenses on the b/s and his only income will be from the supervision/management of the site for construction.
However, this client makes upwards of 400K per year...salary is about 120K and the rest is income from the K-1. Of course, he is making ES payments as well as federal withholding payments. I am hoping to open some new tax saving strategies for him in the coming year. What do you guys think of an MSA for the S-corp or a cafeteria plan in order to reduce some of the taxable income? Also, what about maybe a family limited partnership owned by the s-corp? I am not too familiar with trusts, etc, but can an S-corp be the trustee of a trust set up for the family? Perhaps some income can be diverted into the trust to offset the k-1 earnings? I am racking my brain to come up with some way to reduce his tax. This man is paying tax on his earnings in excess of 70K per year and if we can reduce that by opening up another avenue for him, this would be great!! Any pick a brains out there?
OH BTW: Happy Holy Week !! | |
| 14 April 2006 | |
| The S Corp itself can be used as an effective substitute for the family limited partnership approach, but this type of thing is an estate planning technique, not one for splitting income. | |
| 14 April 2006 | |
| Thank you Dennis. I know that I can fund a trust through the S-corp income and thereby reduce the taxable income of the sole shareholder, but I want to be able to do this and save him money without making things too difficult for him.
If we did an MSA or a Cafeteria plan, this too could be used to offset some taxable income, but I am not quite sure what the best approach would be. If I could reduce his tax by 10K per year, and keep these in assets owned either by a trust for the family and the children of the s/h, then we could issue non voting stock in the corporation and thereby split some of the income to the children, correct? | |
| 14 April 2006 | |
| If you run the numbers through a 1041 you will see why that doesn't work very well. Children over 14 will work, but you have to give them proportional distributions. If client retains 100% economic interest you have a sham transaction. | |
Mtmckeecpa (talk|edits) said: | 14 April 2006 |
| how about a retirement plan of some sort...401k, defined benefit... | |
| 14 April 2006 | |
| Thank you both....I have been speaking with him today about a defined benefit plan or estate planning. This individual will be realizing income of over 800K this year as contracts are of such that he will be forced into an even higher tax bracket. I think right now a PSP is in order from speaking to him. Somehow we need to write off some of the profits of the corporation and still leave him with control of the ownership. Thank you both!! | |
Mtmckeecpa (talk|edits) said: | 14 April 2006 |
| Help me out here...PSP meaning, what? | |
| 14 April 2006 | |
| Profit Sharing Plan. That's not aggressive enough, tho', Sandy. Unless he's going to have other employees, I'd look at a pension plan, the old fashioned defined benefit plan, which would let him stash huge money. That's probably the only good choice. If he's going to have employees, that won't work, but neither will a solo 401k. Then, you are back to a PSP maybe, tho' he'd still be throwing in a lot of money for others. | |
| 14 April 2006 | |
| JR; thank you :)
He does have other employees, sons and another superintendant. This will then result in possible a profit sharing plan that will benefit others but mostly these are his own sons. Maybe a defined benefit plan as well? | |
| 14 April 2006 | |
| Only if he wants to pay big bucks on their behalf in order to get his own stashed. Sons aren't a problem. If he wants to keep that super around and likes the idea of helping him...it's the way to go. | |
| 14 April 2006 | |
| As far as a cafeteria plan goes, that's usually a no-brainer. Company saves FICA/medicare taxes and employees save on their taxes as well. My clients have all come out ahead with the cafeteria plans they have. I'm not so sure it would be real effective in this instance, however. I think there is a limitation on owners, i.e., they are not allowed to participate. I'm not sure what the rules are regarding children of owners. | |
| 15 April 2006 | |
| Correct, S corporation shareholders ( more than 2% shareholders) are not allowed tax free benefits. S Corporations are treated like partnerships with regards to fringe benefits, save retirement plans. | |
