AboutRichard Fritzler Expertise Specializing in Business and Corporate taxation. Comparing the advantages and requirements of different business entities, such as Sub-S Corporations, LLC`s, Partnerships (Both Limited and General), Doing Business as a Sole Proprietor, or Using a C-Corporation. Issues regarding K-1 distributions, 1040, schedule C, 1120, 1120s. Are you considering domiciling a Corporation in a low tax state? I can review the benefits and misinformation that exists.
Experience I have been in the business of assisting business owners in reducing their taxes and liability since 1986. The company is Owelesstax, incorporated, at www.owelesstax.com
Organizations National Small Business Owners Association. Publications Contributing author to "The Corporate Standard Newsletter".
Publications Contributing author to "The Corporate Standard Newsletter".
Question QUESTION: I ran my business as sole proprietorship for many years. Then incorporated, S type a few years ago. I put most of my inventory into the new corporation. I left about 20 thousand of dead inventory out though knowing that I would probably never be able to sell it. I have sold a few items out of that pile recently and I'd like to know the best way to account for that. This is just a single shareholder S corporation.
ANSWER: Although the protocol is specific, the result will be the same. you'll personally pay all the taxes on all the money.
Since it is not a "Corporate Asset" (I use that phrase loosely because the S-corp has lost so many of the feature of a real corporation that it is much closer to a "General Partnership of One" for tax purposes.) it would be attributed to you. You could simply claim you had Consigned the inventory to the business, the business could account for any net profit as a commission, and given you just enough to cover your basis. That way, the profit would not be accounted for on your personal tax return. . . oh wait, it's a Sub-S so it still transfers the tax liability to you through a k-1 and you still have to pay the taxes personally.
If on the other hand, your business was a real corporation that pays its own taxes you would have kept more of the money that you had made.
For instance. the $20k in inventory, if that had a basis of $10k the profit would be $10k given to you you'd pay 30.3% in federal and self employment taxes at least. At the point that you might be able to avoid a portion of your self employment tax the Federal Rate will go to 25% or more.
If that $10k was kept by a real corporation, and taxed on a separate tax return, the total federal tax would only be 15%. That would leave you more after tax dollars to buy more inventory.
I know your CPA/Tax Guru/brother-in-law/Next door neighbor/whatever always told you a Real Corporation is bad, double taxation and all.
Well maybe you need to look beyond the myth and ask why All of the Most Successful Businesses don't take that advice.
I look forward to your call.
Richard Fritzler
www.NevadaCorporateServices.com
800 590-6612
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QUESTION: Thank you for your time. I was kind of hoping you would write something like, when it comes time to use the inventory, just write it up as paid in capital or something like that. It's no biggie. If I hang on to it long enough I'll probably come out better just selling it for scrap.
Answer Absolutely you can contribute it to the corporation. There are tax implication.
You can retain it personally and have the corporation consign and sell it for you. There are tax implications.
You can abandon it as scrap right now and the corporation can acquire it at no basis. There are tax implications.
But in fact since you are operating as a S-corp, all the "Tax Implications" will require some document wrangling and tax return record keeping. But it all flows back to you and the difference (in actual taxes), between the processes is minutiae.
If you were looking for a tax benefit, you are trying to farm a barren field.
If all you were looking for was a detailed procedural list of documents, that would depend on which process you choose.
