NOTE: Every situation is different and federal and state tax laws are subject to change.  This article is presented exclusively for informational purposes and is not intended to substitute for obtaining tax or financial advice from a tax or other business professional. Names may have been changed for illustration purposes.

Q: How do we take distributions from our S-Corp?
–Sol Sagan, Billions and Billions of Stars, Inc, Scituate
A: Structured properly, distributions from an S-Corp can save the owners thousands of dollars annually in payroll taxes. How? Distributions are profits remitted directly from the company to the owners without going through payroll, therefore not subject to either social security and medicare withholding OR the matching contribution required by the company — together, 15.3% of an employee’s wages. So if Sol takes $10,000 in distributions from B and B in February that he otherwise would have taken in salary, he is saving himself $1,530. Quite simply, he just writes a check from B and B to himself. (The profits are still subject to income tax.)

Of course, it’s not that easy.

First, you must have profits and be taking salaries in equal or (preferably) greater sums than you are distributing to yourselves. Otherwise you may be nabbed for evading those federal (and if applicable, state) payroll taxes. Generally, a good rule of thumb is minimum 60% salary, 40% distributions. So if Sol takes $10,000 in distributions he would be wise to take at least $15,000 in salary over the same time period.

Q: Can I take these distributions at the speed of light?
–Sagan
A: Distributions do not need to be taken on a regular basis, they can be irregular, and the amounts can vary. The important thing is that by the end of the year they not represent more than (using the rule of thumb) 40% of your total monies received by the corporation.

Q: Will I fall into a black tax hole?
–Sagan, again
A: Your distributions are not subject to payroll tax, but they are part of the net income that will accrue to you as a shareholder and be reflected on your personal income tax return. I recommend you either increase your withholding on the salary portion, or make estimated tax payments to cover the liability. Consult a tax adviser?

Q: I have a co-owner in a parallel universe. Advise.
–Carl, Sagacity
A: Distributions must be made by percentage of ownership. But you must simultaneously insure that the total salary of each owner exceeds his or her distributions, as per the first “rule of thumb.” More complicated. Consult a tax adviser who can set up an S-Corp and also knows math?

Upcoming Events

UNDERSTANDING SOCIAL SECURITY: Rhode Island Mediators Association, Warwick, RI February 10, 5:30 PM. On panel hosted by estate Attorney Jeremy Howe. Open to attorneys/mediators as well as therapists, accountants and other professionals in supporting fields.  Information/registration here.

MONEY MATTERS FOR ARTISTS: RISD Museum, Providence, RI

Saturday afternoon, February 27. With attorney Steve McDonald on contracts and copyrights! Information/registration.

Here are the steps and links to forming a new (for-profit) business. We strongly advise you contact an advisor (an accountant or lawyer) to help you with the decisions and implementation.

1. 1. Decide on your legal structure – Corporation? LLC? Partnership?

1. 1. Decide on your tax structure – S Corporation? LLC taxed as a partnership? As a corporation?  (Many options – can be confusing.)

1. 1. Execute a partners or shareholders’ agreement if it is a multi-owner enterprise.

1. 1. Choose a name and see if it is available.

1. 1. File either Articles of Organization or Incorporation and pay the requisite fee.  

1. 1. Optional: File a Fictitious Name Statement if you wish to use a D/B/A.

1. 1. Obtain your EIN – Employer Identification Number.

1. 1. If you qualify and are choosing to be an S-Corp, file IRS Form 2553.

1. 1. Open a bank account for the business.

1. 1. If you are going to have employees, arrange with a payroll service or qualified bookkeeper to pay employees and pay and file payroll taxes.

1. 1. If you make sales at retail, register for sales tax – even if your sales may be exempt.

1. 1. Arrange for a bookkeeper or bookkeeping system.

1. 1. Obtain necessary insurance coverage.

1. 1. Obtain on-line credentials so you can file your annual report on-line, as well as other forms.

1. Annually file your annual report with the Secretary of State and pay the $50 fee – failure to do so can result in revocation of your charter; annually file your state tax return with the requisite minimum tax of $500 ($450 effective for tax years beginning 1/1/16).

Here then is a brief set of links to get you started with registration in New England, New York and California.  We will be expanding the list of states – and links to more details within those states – as we move forward.

Thank you to Somerville, Mass  jeweler extraordinaire Karen Christians who urged me to develop this list and has posted it on her wonderful website.

Q: “Why did the State revoke my charter? #$???!!
–Cursed in Cranston (Rhode Island)
A: Incorporation and organization (the rough equivalent of incorporation for LLC’s)  are established under the auspices of state government.

As such, your entities must generally file reports and pay fees, usually annually and to the Secretary of (your) State, to remain in “good standing.” The renewal forms are generally easy — we are not talking a tax return here — and the fees can be less than $100. Often you can do the transaction on-line.

Failure to renew can result in the revocation of your corporate charter — in other words, your entity is no longer legit in the eyes of the law and you have forfeited your legal shield.

(Yes, my firm can help you incorporate. And  to make sure you “incorporate right”, click here. )

Q: They didn’t tell me!
–Furious in Philly
A: I’m skeptical.  States are required to notify you. (Renewal dates vary — in Rhode Island for instance,  non-profits  renew in June, LLC’s in September and October, and corporations in January and February.)

Notifications are sent to whomever you designated as the “resident agent” (or equivalent title) when you first registered. That could be your lawyer if your lawyer is handling the renewals, or it could be you.  Did you move and not notify the state? (There are appropriate forms.) Or was it the original founder, who long ago sped away? Or are you a non-profit and the original board resigned in a food fight two years ago and no one remembers?

Doesn’t matter! It’s your responsibility — as the executive director or board chair. And it’s easy to check — most states have a “corporate database” that is online and publicly available. You can find out the current status and view current filings. Sometimes I am the one to tell the client — “you’ve been revoked!” Why don’t you check right now? Click here for Rhode Island and here for Mass.

Q: I can always reinstate — right?
–Ridiculous in Revere
A: Oftentimes yes,  but this is not a great way to operate. (I have one client for whom this is an annual exercise.) For one thing, you lose the corporate legal protections in the interim. And then there is the time and the expense — you are at the whim of the state, which then also has the right to demand that all your obligations be made current before they reinstate you — so if you are behind on corporate tax returns or even sales tax returns — watch out.

COMING EVENT!

Eager to set your business up right? Come to my free presentation, “Structuring Your Self-Employment for Success”, at Rochambeau Library in Providence on September 16. Details here. Open to (members and) non-members of the Providence Entrepreneurs Meetup Group, the kind sponsor.

BECAUSE YOU ASKED

Back in 1975 I  co-authored a “landmark tenant research report” about a notorious Boston landlord, Maurice Gordon. It was a muckraking adventure and ran nearly 180 pages. Gordon was most infamous for a 1971 fire in Boston’s Fenway district.  Eight people died in a building lacking fire extinguishers and with bags of rubbish in the hall. Maurice, alas, was Jewish and there were protests at his synagogue.

The accompanying cartoon, from the Boston Phoenix, part of a collage in the book, is a commentary on Gordon’s close  ties to then Boston Mayor Kevin White, in the top hat.

My elaborately detailed report, with news clippings and flowcharts of connections, was summarized and reprinted in a series in a local newspaper. See below.

I totally loved the project, which I also managed to use as credit for two college courses at Boston University.

Because you asked. And by all means, keep asking.

From a presentation at Social Enterprise Greenhouse

Click to view slideshow.

Q: I’ve never made a dime even though my art hangs in all the major museums. Now I am told the tax people could reclassify my activity as a hobby?
–P. Picasso, penniless in Paris

A: Well monsieur, I cannot speak for how the socialist French tax their artists. In the United States there is an expectation that one is in business to make a profit. A good rule of pouce (thumb) is to show a profit in three out of every five years to avoid an IRS audit. However, a recent court ruling gives artists much more leeway than traditional businesses, and I have clients who have never shown a profit and still walk the boulevards in peace. Then again, if you French didn’t take such long vacations maybe you’d earn a bit more, n’est pas?

Q: I was told to organize as an LLC to save on taxes. But maybe I didn’t hear this correctly.
–Ludwig LLC, Bonn

A: Herr Beethoven I cannot speak for the bureaucratic Germans. Nevertheless an LLC — Limited Liability Company – is only that, it does not provide any specific tax breaks. It is simply a sole proprietorship with a legal schild (shield), which may be important to you. In some states there are annual franchise fees to contend with (RI and Mass, $500).

Here in the U.S. we do not overtax our citizens just to provide silly fringe benefits like health insurance. If your income is sufficient you may save some taxes by incorporating as an S-Corp, see my artikel.

(By the way L, I am told that Streitfeld is derived from the German for battlefield. So I know something about schilds– and wait till you hear the story of my boys’ names.)

We can help you incorporate.

Q: I write for a living, do I have to pay estimated taxes?
–Fyodor Dostoyevsky, Leningrad

A: F. it really depends on how many rubles you make. If you have a job as an employee you may simply increase your withholding; or, come on, your babushka supports you, so let her take more taxes out of her paycheck. In the United respecter of sovereign countries* States the IRS does not care how you pay — withholding, estimated, through a spouse (if you file jointly).

Then again your new documentary Pennies from Amazon may not yield you much income, or perhaps you can claim a loss. Then your taxable income goes down.

* with periodic exceptions

Q: I make and sell sculptures for a living, and I hear Rhode Island is a safe haven for sales tax on artwork.
–Michael Angelo, Roma

A: Indeed. Starting a year ago sales of “original and limited sales of art” in Rhode Island became exempt from sales tax.. However, you still must apply for the exemption and continue to submit monthly reports, even if you owe no tax. Note that consumables (e.g. candles, soaps) and mass-produced items (e.g. sold in a bookstore) would not qualify. Rhode Island State Council on the Arts has an excellent guide as well as links to the registration forms.

You may want to download yourself from that chapel ceiling before you download the forms.

Q: Which vegetable do strangled painters covet?

A: An artichoke

I give live talks and webinars on self-employment for a wide variety of professionals, including artists. Contact me for samples and availability.

Q: How long should I keep tax records?
B. Madoff, investor

A: In general it’s advisable to save documentation supporting your tax return for seven years. The IRS generally has three years from the date of filing to audit your return, but up to seven if it suspects you under-reported your income. If you didn’t file or filed fraudulently there is no time limit — so keep meticulous records of your embezzlement, okay?

Q: Is there an easy way to do this without cluttering my cell?
A. Capone, Alcatraz

A: Digital is the way to go,Al. Scan your paper receipts and tax documents into a file and archive it. Once a year send a back-up to your CPA, ex-wife or Elliot Ness.

Q: I freelance a bit mixing investments and putting distance between people and their money. What else should I save?
C. Ponzi, Roma

A: If you are a freelancer like Chuck who files a “Schedule C” and deducts expenses from self-employment income, save all the documentation supporting your income and expenses.

Q: I put all my business expenses on my Worldwide Wrestling Federation credit card. Need I save all the underlying receipts?
B. Cianci, candidate

A: Depends if the nature of the activity is evident by the description on the statement. Motel Six is for lodging but Target could be for your pet’s dog food or your kennel business. A credit card and/or bank account used exclusively for business is also helpful.

Q: I preach impermanence but am told some things should be saved permanently. Advise.
S. Buddha, India

A: Some examples might be business tax returns, home purchase documents and investment records if you purchase securities independently of a broker. If you are a partner in a business, save any documents related to what you paid for your share and how profits and taxes are to be allocated.

Q: How else can I be efficient and tidy in keeping records?
M. Stewart, fussy

A: If you deduct medical expenses ask the drugstore for a print-out of your prescription drug purchases, recreational marijuana use and the number of times you had a question for the pharmacist. If you have a business or rent property a bookkeeping system or qualified bookkeeper is essential. (Balancing Act, — part of my company — does that, and we know others.)