Chapter 4 Introduction

By Jason Watson, CPA
Posted Sunday, October 29, 2023

Not everything that glitters is gold so there are a handful of downsides, some manageable, to the S Corp election or having an LLC. A lot of these examples stand alone, and some of these depend on the net income of the business and other external factors. WCG can help guide you through the decision-making process.

And No, there are not 185 reasons- it was just a self-proclaimed catchy number. Most of these reasons in the beginning of this chapter focus on S corporations. However, there are some general pains with having any type of formalized entity, and those are near the end.

Specifically, in this chapter we will review these disadvantages to having an S corporation-

• Increased cost (tax preparation, payroll taxes)

• 401k or SEP IRA limitations

• Trapped assets

• Disparate distributions not allowed (but we have a work-around)

• Other W-2 income

• Deducting losses, trapped cash

• Expanding ownership

• State taxes

• Among other smaller issues

Specific to S corporations, we ask these general questions of each business owner before diving into the nitty-gritty-

• Does your business earn over $48,000 net income after expenses (profit)? Say Yes.

• Are you located in New York City or Tennessee where S corporation tax rates are egregious and suck up all the federal tax savings? New Hampshire? Say No (unless you are being limited by Section 199A for lack of wages).

• Do you have other W-2 income that exceeds or comes close to exceeding the Social Security limits of $168,600 (for the 2024 tax year)? Say No.. If you say Yes, we need net ordinary business income after expenses and deductions to exceed $250,000 in #1 above.

• Do you have other W-2 income that exceeds or comes close to exceeding the Social Security limits of $168,600 (for the 2024 tax year)? Say No. If you say Yes, we need net ordinary business income after expenses and deductions to exceed $250,000 in #1 above. Say Maybe.

• Is this a going concern? In other words, is the business going to continue to earn the same income or more each year? Say Yes.

• Do you have an LLC or some other entity in place that can be elected to be taxed as an S Corp? Say Yes. If you say No, we have options just not elegant ones.

Are you still here? Excellent news… then read on!