Comments on: The Million Dollar S Corporation Mistake

By: jpdx

jpdx — Thu, 30 Nov 2017 07:14:50 +0000

What is the profit threshold to where it generally is worthwhile to form a S Corp instead of a Partnership? Is it common for a business with, say, 50k of profit (two owners, spouses) to organize as a S Corp?

P.S. Found your blog on MMM forum.

By: Steve

Steve — Sun, 22 Jan 2017 22:29:41 +0000

In reply to Julius Agbayani.

Hi Julius, Great questions… and for what it’s worth, in our CPA firm we use a Simple-IRA because none of rank and file team members want to save more than Simple-IRA allows.

If a shareholder can use a SEP, however, I like that option… with the SEP, the match on the shareholder-employee essentially means the pension contribution comes out of the business’s profits and reduces the distribution to the shareholder. In a backdoor way, it even sort of increases the compensation to the shareholder.

E.g., if you’re arguing with an auditor about whether $48K is too low… but then you point out that, well, the shareholder-employer also had $12,000 of pension matching from the employer… so really the total package is $60K, I think that makes a difference. Other practitioners–maybe you included–might feel differently…

P.S. Regarding investing in the business, totally agree that’s often the most attractive option for business owners. Especially in the early years. Over time, though, I personally think a pretty good case can often be made to build wealth in a pension account outside the business. But again, agree with your good point here.

By: Julius Agbayani

Julius Agbayani — Sat, 21 Jan 2017 18:45:15 +0000

Hi Steve, excellent analysis and easy to understand. How about using SIMPLE IRA? Any thoughts? I am thinking the contribution to a SIMPLE IRA will also bump up shareholder’s wages (thus more reasonable?) plus then you the S-corp 3% matching. It looks like you prefer SEP? Most of my clients cannot afford more than $12K (plus catch up) and if they do they prefer to invest in their business or other investments rather than tying up in an IRA.

By: Steve

Steve — Wed, 18 Jan 2017 17:19:04 +0000

In reply to Ana.

Hi Ana, You will still be able to use a solo 401(k) for an LLC operating as an S corporation. But the math will work differently.

Say your sole proprietorship makes $100,000 a year for sake of illustration. In this situation (and very roughly) you can contribution $18K as an employee… and then roughly $20K as an employer. So roughly $38K total pension deduction.

If you operate as an S corporation, make $100K, but pay yourself only $40K in wages, you can still do that $18K “employee” contribution… but the employer contribution is limited to 25% of the $40K… or $10K… in this case, therefore, your total contribution maxes at $28K.

Consider these numbers rough. I’ve rounded them to make them easy to read. They are close to values you put on a tax return…

By: Ana

Ana — Wed, 18 Jan 2017 02:58:35 +0000

I don’t know very much about different vehicles for retirement investing, but I have a solo 401k that I set up as a small business owner (sole proprietor). If I switch to an LLC S-Corp will I be able to make contributions to that 401k in the same manner that you’re describing above with a SEP-IRA? Do I have to “match” the employer contributions as an employee, or can my S-Corp be the only thing that puts money in there as part of my employee compensation? I am thinking that details about this might be answered in your ebook about saving taxes, so if it is, can you let me know that too? I am interested in the mechanics of how to set this up so that I’m doing the correct thing through the coming year. Thanks!