 Dear Tax Talk:
I am a self-employed carpenter. I currently operate
as a C corporation . I pay myself a salary, pay
my health insurance, and put what is left in a
SEP IRA. At the end of the year the corporation
profit is near zero. Can a sub-chapter S corporation
(S corp) or a limited liability company (LLC)
save on taxes? I have no other employees.
-- Tom
 Dear
Tom,
Each type of entity has its advantages and disadvantages. Without looking at actual numbers, it is impossible to tell which entity will save you taxes. An advantage of a C corporation without other employees is that you can set up a medical reimbursement plan.
Health insurance is usually deductible
by an S corporation owner or an LLC member at
some level, as is the health insurance of a C corporation owner. S corporation owners and LLC
members can't have a medical reimbursement plan
similar to a flexible spending account in a cafeteria
plan. However, a C corporation owner/employee
can have his out-of-pocket medical expenses reimbursed
tax-free. Another advantage: A C corporation that is not a personal service
corporation has graduated tax rates. A personal
service corporation is an employee/owner-controlled
corporation that generates its income from fees
charged for services such as an attorney, accountant,
doctor or consultant. Carpentry is not considered
a personal service, as materials are an integral
part of the service. In a C corporation , the first
$50,000 in taxable income is taxed by Uncle Sam
at 15 percent. This may be lower than the owner's
marginal tax rate, had the owner included the
net income on their personal return such as in
the case of an S corporation or LLC member.
A disadvantage of a C corporation
is that, in order to draw out all the earnings,
you have to pay employment taxes. This isn't so
much a concern if your salary is over the FICA
cap of $97,500.
Another disadvantage is double taxation
and lack of capital gains rates. A sale of appreciated
property by a C corporation may result in half
of the gain going to taxes at the corporate and
shareholder levels, whereas the sale of appreciated
property by an S corporation or LLC can result
in as little as 15 percent in taxes.
In order to tell if the C corporation is a viable entity in the
future, you should consult with a qualified CPA
who can review your entire financial picture.
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