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You're saying if my income were ~$60,153, I would only be…

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you're saying if my income...
you're saying if my income were ~$60,153, I would only be taxed on ~$40,000 if I applied the 80/20% idea, which could be considered "Reasonable compensation".So my FICA would be $3,000 more, however, my federal and state tax liability would go down by $20,000.And that "dividend" would not be taxed in any way by state or federal standards?
Submitted: 6 months ago.Category: Tax
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1/9/2018
Tax Professional: Carter McBride, Certified Public Accountant (CPA) replied 6 months ago
Carter McBride
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If your income before your wage is $60,000 and you took at $40,000 wage, you would have W-2 income of $40,000 and $20,000 of pass-through income. Under the new tax bill, you'd get a 20% deduction, so $20,000 * 20% = $4,000, so you would pay tax on $16,000 of pass-through income at your marginal tax rate.

As long as you have basis in the company, any distribution (dividend is a C Corp term) is not taxable. If you do not have basis in the company, then it would be taxed. For example, if you put $10,000 into the company, your starting basis is $10,000. After year 1, using the numbers above, you would have $16,000 more basis, for $26,000 of total basis, less any distributions you take.

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Customer reply replied 6 months ago
I am confused about "basis". We started this distributorship, we pay $353.23 per week for the "rights" to this territory from money we make from the business. He is the only worker/employee/owner. We also financed a $41,000 truck to the tune of $620 per month. We depreciated the total of this truck over 7 years. How do we determine how much "basis" we have if we set up an S-Corp? Does the new tax bill go into effect for 2017 or 2018?
Tax Professional: Carter McBride, Certified Public Accountant (CPA) replied 6 months ago

Basis starts with whatever you put into the company. You would contribute the truck to the company. Whatever the basis in the truck is 41,000 less its accumulate depreciation plus any cash or other assets you put in less any liabilities you transfer over will be your beginning basis. This is your starting basis on day 1 of the S Corp.

During the year, you will generate taxable income. This taxable income increases your basis.

If you take any distributions from the company outside of your wages, then this will decrease your basis.

At the end of the year, you tax beginning basis + net income - distributions to get your ending basis. This basis is then your beginning basis for the next year.

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Customer reply replied 6 months ago
as long as you have "any" basis in the company, that pass through income is tax free.
Tax Professional: Carter McBride, Certified Public Accountant (CPA) replied 6 months ago

Yes, That is correct.

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Tax Professional: Carter McBride, Certified Public Accountant (CPA) replied 6 months ago

Any money that is a distribution is tax free. For example, if you took a $40,000 wage and then took $20,000 out as distributions. That $20,000 is tax free as long as you have basis.

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