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socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 38244
Experience:  Retired (mostly)
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I am a physician looking to form an S corporation practice.

Customer Question

I am a physician looking to form an S corporation for my practice. I also am trying to incorporate a multimedia medical website that I run that will have large expenses initially, but will be making a profit within 2-4 years if the business plan is successful. What is the best way to balance these two aspects of my finances as far as incorporation? What type of corporation would be best for the second entity? I am interested in understanding this from the perspective of tax benefits vs personal asset protection.I was told that the benefit of a C corp over an S corp was that losses would accumulate and could be deducted later, while in an S corp they would "pass through". He indicated that I could not deduct losses for a business that was not showing profit, so with an S corp these losses would not be deductible. With a C corp, he indicated that I could later deduct the initial expected losses once the company became profitable. Is this correct?
Submitted: 7 months ago.
Category: Tax
Expert:  socrateaser replied 7 months ago.

Hello,

While an S Corporation will pass through any NOL to its shareholders, those shareholders can use the NOL to offset their individual taxable income. So, if you have taxable income separate from your business entities, then you can use the S Corporation's NOL to offset your taxable income.

That said, in my opinion, the real benefit to a C corporation, as opposed to an S corporation (or an LLC), is that while corporation income is below $75,000 annually, the corporation's marginal tax rate is only 15%. As a physician, this may mean that you can retain earnings and net operating losses within the corporation, and offset each, while trying to grow the business.

The downside to this is that when you distribute the income, you will be taxed on the dividends as ordinary income -- which will increase your tax liability, unless you plan to retain the assets in the business until you retire, and you are in a lower tax bracket.

The asset protection value of the corporation may be more significant, if the online business has the potential to create liability which may extend into your personal assets, if you are sued. It's easier to defend a C corporation as a separate entity than an S corporation in court. So, if this is a concern, then a C corporation may be what you need to help protect yourself.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, I receive nothing for my efforts in your behalf.

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Expert:  socrateaser replied 7 months ago.

Hello again,

I made a small error in my original answer, which I feel obliged to correct. The 15% tax rate ends at $50,000 taxable income. The next $25,000 in taxable income is taxed at 25%. Again, my apologies.

I hope I've answered your question. Please let me know if you require further clarification. And, please provide a positive feedback rating for my answer (click 3, 4 or 5 stars) -- otherwise, I receive nothing for my efforts in your behalf.

Thanks again for using Justanswer!