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should be mindful that if he has any debt or claims against his business before operating as an S-Corporation, will remain his liabilities and will not be shared with others shareholders. Employee Benefits Most fringe do not apply to S-Corporation, except fringe benefits paid to 2%
shareholders. Many fringe benefits are deductible by the corporation and taxable to the shareholders (Rupert, Pope, 2016). Fringe benefits that are limited by more than 2% shareholdersinclude:●Group term life insurance payments (Sec. 79)●Accident and health benefit premiums and payments (Sec. 105 and 106)●Meals and lodging furnished by employer and cafeteria plan benefits (Sec. 125)Tax LawAccording to the IRS, an S-Corporation is a corporation that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes (S Corporation, 2018). The shareholders of S-Corporation are required to report the flow through ofincome and losses on their personal taxes using the 1120s tax form. The shareholder will use their individual tax rate when filing, which benefits the S-Corporation from avoiding double taxation. To qualify for an S-Corporation a corporation must meet the following requirements:●Be a domestic corporation ●Have only allowable users ●Have no more than 100 shareholders ●Have only one class stock●Not be an ineligible corporationThe typical tax year for an S-Corporation is usually a required tax year. A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations (Publication 538, 2016). To change the tax fiscal year, the S-Corporation will have to show a legitimate business purpose for the change.My Client Bob Jones is making the decision to transition his Car Business from a sole-proprietorship to an S-Corporation. Mr. Jones would like to bring his daughter Mandy Jones in as
a business owner and manager with 40% interest. He is looking for the best tax advice before he makes his decision. It is important that S-Corporations pay reasonable salaries to shareholders who perform services for the corporation. The IRS is on the lookout for corporation failing to pay reasonable salaries, or failure to pay any salary at all. According to FICA payments to shareholders for their services are considered and should be treated as wages (S Corporation Employees Shareholders and Corporate Officers, n.d..). This means shareholders are subject to FICA and self-employmenttaxes on wages. The employment tax consists of federal income tax, social security tax and medicare tax for the employee. Mr. Jones would like to withdraw $180,000 per year for his salary, and $70,000 per year for his daughter Mandy. Mr. Jones has a high tax bracket and will pay more in taxes if he withdrew the entire $180,000 instead of splitting the withdrawal between annually salary and dividends.