If I Export Products, Should I Set-up a DISC?

Yep.  If your company generates significant income from exporting products made in the US, or from engineering or architectural services related to foreign construction projects, you should set-up a domestic international sales corporation (DISC).  A DISC is relatively easy and inexpensive to set up and operate.  And setting up a DISC can reduce the federal income tax rate on your net export income by up to 20%.

To set-up a DISC, you need to incorporate in one of the 50 states or the District of Columbia, file an election with the IRS for the corporation to be treated as a DISC, maintain a minimum capitalization of $2,500, have only a single class of stock, and meet an annual qualified export receipts test and a qualified export assets test.  The DISC must have its own bank account, maintain separate accounting records, and file US tax returns. But there is no need for the DISC to have its own office, employees, or tangible assets. 

Under federal tax law, the DISC pays no federal income taxes.  And setting up the DISC reduces your overall federal tax liability significantly.   The DISC tax benefits flow from the commission payment made by your export company to the DISC. The commission payment is equal to the greater of 4% of your export receipts or 50% of your export income. The commission payment is fully deductible by your company and is not taxable to the DISC.  The commission payment is only taxable (at the 15% qualified dividend rate) when the monies are distributed to the DISC shareholders. 

For the most part, qualified export receipts are proceeds from the sale of tangible products.  To qualify, such tangible products must be: (1) manufactured, produced, grown, or extracted in the US; (2) held primarily for sale, lease, or rental for use, consumption, or disposition outside the US; and (3) have a maximum of 50% foreign content.  Export property does not need to be newly produced property.  Used equipment and scrap also qualify.  There is also an exception whereby payments for engineering and architectural services related to construction projects outside the US are considered qualified export receipts.

Give me a call or email if I can help you set-up an DISC.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  Many businesses have been improperly classifying employees as independent contractors. The reason? Classifying workers as contractors rather than employees can save an employer 20-30% of its labor costs.  The IRS has voluntary worker classification program that will allow businesses to reclassify their workers as employees, and pay only a small amount to cover past payroll taxes.  However, the IRS also announced plans to aggressively audit and look for worker misclassification in the future.  Give me a call if you have any questions about whether your workers can or should be treated as employees or independent contractors.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

 Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

How Can I get Money Out of My “S” Corporation?

There are a lot of different ways to get money out of your “S” corporation.  Most “S” corporation shareholders also act as an employee, director, landlord, contractor, lender or creditor of their corporation.  And you have every right to be paid for the products or services you provide to the corporation in such other role.  Most “S” corporation shareholders receive payments in the form of W-2 compensation and “S” corporation distributions.  But sometimes other payment forms make sense.

Rather than have your “S” corporation acquire real estate or office equipment, you might consider setting up an LLC and renting the real estate and equipment to the “S” corporation.  You also might consider having your spouse or children be the owners of the LLC.  Having a separate LLC owned by your spouse or children rent the property to the “S” corporation gives you the ability to get money out of the “S” corporation and get it to your spouse or children who might be in a lower tax bracket and who are not liable for debts and obligations of you or your “S” corporation. 

If your “S” corporation needs monies for expansion, the owners could all contribute the necessary monies.  But another possibility is to structure the advances as loans.  This is a good solution when not all the owners can or want to make an advance or contribution to the corporation.  It also provides a way to get your money back out of the corporation in the future with interest.   And if you file a financing statement to record the loan, you can put yourself ahead of unsecured creditors of the corporation.

If you are serving as a director of the corporation, it is possible to pay yourself (and other directors) a directors fee.  Unlike “S” distributions, the directors fee does not need to be pro rata among the shareholders based on ownership.  And unlike W-2 compensation, the directors fee is a 1099 type payment and not subject to payroll taxes.

Bottom line is that there are many ways to skin a cat.  If you wear a lot of different hats in connection with your “S” corporation, it is worth exploring how you are getting paid.  You might find that different payment formats reduce your overall tax burden, permit you to protect assets from creditors, reduce your risk of non-compliance with the “S” corporation single class of stock rules or give you an opportunity to shift some income to family members in lower tax brackets.     

 Please call or email if you want to know more about how to get money out of your “S” corporation.  Jsenney@pselaw.com or 937-223-1130. 

AND ONE MORE THING.   if you have any questions about whether your workers can or should be treated as employees or independent contractors.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

Any Tax Consequences to Setting-up a QSub?

A QSub is a subsidiary corporation owned by an “S” corporation.  An  election must be made to treat the subsidiary corporation as a QSub or the subsidiary will be treated as a taxable “C” corporation. When a QSub election is made, the separate existence of the QSub is ignored for federal income tax purposes (but not payroll tax purposes) and all of the income and expense of the QSub are treated as income and expense of the ”S” corporation parent.   Making a QSub election for a newly-incorporated subsidiary is a non-taxable event.  There is no gain or loss realized or recognized by the QSub or the “S” corporation parent.  But this may not be the case if an “S” corporation acquires the stock of an existing corporation and makes a QSub election for such existing corporation. When an “S” corporation acquires the stock of a corporation and makes a QSub election for such subsidiary corporation, the subsidiary is treated as if it liquidated into the “S” corporation parent.  The deemed liquidation will generally be treated as a tax-free subsidiary liquidation.  But the subsidiary may be subject to the LIFO recapture tax, and the "S" corporation parent may be liable for built-in gains tax.  Built-in gains tax would only apply if the subsidiary was previously a “C” corporation, and the property of the subsidiary that is deemed transferred to the “S” corporation parent was sold within the recognition period.  More on built-in gains tax in a future blog.  Please call or email if you want to know more about how or why to set-up QSubs as part of your overall business structure.  Jsenney@pselaw.com or 937-223-1130.  AND ONE MORE THING.  How long has it been since you had a Legal Audit?  The Business attorneys at PS&E would like to meet with you and do a free legal audit of your company.  As part of the legal audit, we will work through a checklist with you and identify areas where you may be at risk.  If you would like to schedule a free Legal Audit with one of the PS&E attorneys, please send me an email or give me a call.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

What is a QSub and Why Do I Care?

It is possible for one corporation to own and operate multiple different businesses as “divisions.”  But for liability reasons, smart business owners generally put each separate business into a separate corporation.  This can be done in the form of a parent-subsidiary organization structure or a brother-sister organization structure.  Both structures have their advantages and disadvantages.  In a parent-subsidiary structure, all of the income and expense of the multiple entities is reported on the parent corporation’s income tax return.  In a brother-sister structure, each of the corporations must prepare and file it own income tax return.    If the owners of an “S” corporation with multiple businesses wish to utilize a parent-subsidiary structure for liability reasons, they need to set up qualified subchapter S subsidiaries (“QSubs”).  Under federal income tax law, “S” corporations are not permitted to be owned by corporate shareholders.  As a result, the subsidiary corporations will be taxable as regular “C” corporations unless an election is made to treat them as QSubs.  An “S” corporation elects to treat an eligible subsidiary as a QSub by completing and filing IRS Form 8869. The election form must be signed by a person authorized to sign the “S” corporation's return.  The election can be made by the “S” corporation parent at any time during the tax year and is effective on the date specified on the election form or on the date the election form is filed if no date is specified. The effective date specified on the form cannot be more than two months and fifteen days before the date of filing and cannot be more than twelve months after the date of filing. When an election is made to treat a subsidiary as a QSub, the subsidiary’s separate existence is ignored for federal income tax (but not payroll tax) purposes.  All of the subsidiaries income and expenses roll-up into, and are reported as part of, the parent’s “S” corporation income tax return.  The QSub is still required to get its own employer identification number and collect, deposit, pay and report payroll taxes and income tax withholding.  The QSub’s separate existence also continues for state law contract and liability reasons.  So by setting up separate subsidiaries and electing to treat the subsidiares as QSubs, the "S" corporation owners have maintained taxation of their business income as "S" corporation  income, while adding additional state law liability protection.  Please call or email if you want to know more how to use or set-up QSubs as part of your overall business structure.  Jsenney@pselaw.com or 937-223-1130.  AND ONE MORE THING.  Ohio law permits control shareholders to eliminate minority shareholders as part of a merger.  If you would like to know more about how to structure a merger transaction, please give me a call or email.   Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation