New/Smart Business – March 2011

Make your S corporation election by March 15

If you own a small business corporation that operates on the calendar-year, you have until March 15, 2011, to choose S corporation status for this year. In order to become an S corporation, you'll need the unanimous approval of all shareholders.

The principal advantage of an S corporation is that you avoid paying double taxes. In a traditional C corporation, profits are taxed at the corporate level and then they're taxed again when paid to individual shareholders as dividends. In an S corporation, there are generally no taxes on earnings at the corporate level. Instead, profits or losses flow directly through to the shareholders. They pay taxes only once, when they report their share of earnings on their individual tax returns.

Another advantage: Doing business as an S corporation can be attractive in the early, unprofitable years of a start-up business. That's because operating losses flow through your personal tax return, perhaps offsetting other taxable income.

There are some trade-offs for these tax benefits, though. If you're an owner-employee and own more than two percent of the company, you'll receive less favorable tax treatment of some fringe benefits. There are also ownership limitations. The company can have only one class of stock, there can't be more than 100 shareholders, and all of the shareholders must be U.S. citizens or residents.

Despite these drawbacks, doing business as an S corporation can still offer some tax planning advantages. If you can meet the ownership requirements, it might be well worth considering an S corporation election. Contact our office for an in-depth analysis of the pros and cons for your company.

Cash in on the new business rules

Get an early start to maximize the new tax breaks for your business. The 50% bonus depreciation was increased to 100% - but only for assets purchased from September 9, 2010, through December 31, 2011. While this increase makes it seem there's little difference between bonus depreciation and Section 179 expensing, each election has distinct rules that can impact decision making. One example: Bonus depreciation is available only for new assets; expensing applies to both new and used assets.

Another depreciation break is the reinstatement of the 15-year expensing period for qualified leasehold improvements, restaurant property, and retail improvement property.

Qualified businesses with fewer than 25 full-time employees can receive a tax credit of up to 35% of employer-paid health care costs.

Another fringe benefit to consider is the tax-free reimbursement of employees' mass-transit commuting expenses. Workers can be reimbursed up to $230 per month for qualified highway vehicle transportation and transit pass expenses, and up to $20 per month for bicycle commuting costs.

While it doesn't reduce your tax bill, you might raise your workers' morale by informing them that they no longer have to account for the personal use of their company-provided mobile phone. Such recordkeeping requirements were eliminated last year.