Tax Law (Questions About Taxes)/Sub-S and Schedule C
I am sole member of an LLC that is taxed as Sub S. (Used to be a inc. Corp, reorganized as LLC, kept the sub S category). I have been 1099 myself along with subcontractors I use. I don't work full time, just do some managing. I do have a personal vehicle I use solely for the business and also have an office in my home for exclusive business use. I have been using schedule C in prior years to deduct home office and auto business expenses. Is this the right way to do this? Should I be filing simply as an LLC and drop the sub-s categorization? I am a little confused by the right way to do this. I drive about 20000 miles per year for the busiess and so this is a substantial deduction for the car alone, not to mention all the office deductions. thank you.
It may seem substantial, but it is small compared to a lot of other tax issues that you aren't asking about. At 50.5 cents a mile that is a little over $10,000 of deduction, BUT that doesn't reduce your taxes by $10,000 you just get to save the tax rate on that $10,000 so if you are in a 28% Federal tax rate (earing maybe $200,000 a year) you save $2800. if you are in a 25% tax rate (somewhere over $50,000 a year), that $2500, at 15% rate that would be $1500. This is assuming that you don't experience the AMT, or Phase-out. Does your home office fit the IRS requirements for the Home Office Deduction? Are all your miles REALLY business miles? Do you have a log? Updated daily? and Accurately? I'm not trying to take away your deduction, I'm trying to show how the IRS will. (and if they do, you'll have to pay all the back taxes for all the years, along with penalties and interest.
YOUR 1099 income from YOUR 1120s business, is wrong. And may be costing you a lot in taxes. The only reason a Sub-S has to exist is that it can reduce some portion of Self Employment Tax in a narrow window of revenue levels. But your 1099 income is all subject to Self Employment, and whatever other profit the Sub-S status transfer to you will also be subject to Self Employment tax. If you make $100,000 a year, then the self employment tax alone is $15,300 cutting that by 20% is more than the tax savings above.
But even that; saving the 15.3% Self Employment tax of a good portion of all the profit you make instead of giving them to the government as extra taxes as you do now is smaller than the real tax drains you are experiencing, doing business the way you are.
Even bigger is that the LLC or the S-corp, or any partnership is a pass through entity and forces 100% of the revenue to be taxed on your personal tax return at your personal tax rates. AND PERSONAL TAX RATES ARE VERY HIGH.
So a couple thousand dollars of saving that may be questionable, or tens of thousands of dollars in taxes that you don't have to pay? Which are you most concerned about?