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Accounting and tax question for start-up S Corp

• This is really a four part question regarding start up expenses and taxes. I know that the "how to" recommends breaking them up, but they are all somewhat in context, and I fear that by breaking them up, I'll lose valuable perspective in the response. I understand that GA Researcher answers do not take the place of a professional accountant/tax pro, and for that reason, I'm asking for backup whenever possible. I've put a $20 price, but can pay an additional $10 per question tip if you can provide a complete, succinct and authoritative answer (preferably linked to an online source for verification or more info.) This would be a total of $60, perhaps more if you really blow me away. Note: Tax questions relate to Federal tax only as I'm in a state with no state income tax. 1) Can business expenses incurred prior to the incorporation date (or S Corp election) be applied towards that tax year? Perhaps it has to appear on the individual return rather than the corporate? I've also heard about the expenses being considered a capital investment, (in other words, no "reimbursement" from the company back to the principal, but the value of the items purchased and services purchased get recorded -- somehow -- how I don't know. I'm concerned that then those "assets" would be taxable instead of being an expense. What is the best way (from a tax perspective) to record and somehow get credit/account for these expenses? 2) I've heard of a principal making a capital investment (cash and/or tangible assets) into an S-corp, and having the S-Corp owe an unsecured note back to the principal (as an individual) at a low rate of interest. I don't know if that's the best solution to #1, but it seems like a good way to invest capital in the company if you are looking for tax benefits (interest expense) and also as a way to pull money back out of the company (perhaps without incurring income tax since you've been taxed on that money {less interest} when you first made it?) in repayment of the loan. Is this even legit? If so, is the repayment taxable as income and what are the risks (if any) of having the same person on both ends of the agreement? 3) I've been deferring my salary since I started the company. Is deferred comp taxable? As far as the corporation goes, can it be considered an accounts payable item? How do I deal with this from an accounting/record keeping and tax perspective? I'm hoping one of the GA Pros on this site has some start-up accounting and tax experience. If you can only provide the details of how these are accounted for, my price is $20. The $10 tip per question is for the complete answer to the question and for providing backup (links or quoted content with source) that clarifies the answer. P.S. We use QuickBooks (standard, not pro) which handles all of our simple stuff, but these things are a little out of the ordinary. THANK YOU GA RESEARCHERS! You are the best!

• Answer:

  Dear Margi, Having formed an S-Corp for your business is an excellent idea, especially if you have losses. I really recommend, that while Google Researchers are excellent, brilliant, wonderful, and really quite expert, you need someone to work directly with you, who can sit down with you and view your entire business plan, strategy and market, and work with you to set up your tax planning. We can answer questions in broad sense. But without being privy to the specifics of your business, we can't give you all the help you need. So, aside from this answer, please see if you can hire a good, local tax pro who understands your industry and S-Corporation, too. Regardless, we will always be here to help. 1)[Can business expenses incurred prior to the incorporation date (or S Corp election) be applied towards that tax year?] In general, expenses taking place before you were open for business are considered start-up costs. The Internal Revenue Code tells you to amortize those costs over 5 years or more, depending on what they were. However, there are ways to pick up some of those costs and get the benefit of them. Here are two options: a) If you spent money on equipment and assets, you may contribute them to corporation, at your cost (since they were new). Then, you may take advantage of the Section 179 expensing option that lets you write off up to $24,000 in 2002 (up to $25,000 in 2003, with President Bush's Economic Stimulus Package wanting to raise that to $75,000) http://www.irs.gov/formspubs/page/0,,id%3D104269,00.html#T34 b) Some expenses may qualify as legitimate operating expenses. (Consult with your tax pro to determine which.) For those, you may prepare an expense report and submit them to your corporation for reimbursement. That way, you get money out of your S-Corp and you also get the write-off. In response to your last question (4) Since an S Corp's taxes pass through to the individual, can losses for a given tax year be applied to gross income earned earlier in the year so as to lessen the tax burden, or are these items somehow dealt with individually? On the other hand, if you had the same business before you opened the S-Corporation, you may want to keep many of those expenses in your (Schedule C) old business. These expenses will reduce your profits and the 15.3% self-employment taxes you must pay on those profits. Have your tax advisor review those expenses and see if it makes sense to leave them in the previous business. 2)[I've heard of a principal making a capital investment (cash and/or tangible assets) into an S-corp, and having the S-Corp owe an unsecured note back to the principal (as an individual) at a low rate of interest.] Yes. That's a good idea. If the company doesn't have the money to pay you when you submit the expense report, show the amount due to you as loan to officer. Use the Federal Applicable Rate table to find the lowest interest rate allowed by IRS. http://tax.cchgroup.com/taxbuddy/afr.asp You asked about the risks? And is it legitimate. Certainly, it is legitimate and legal. The risk is that if you don't actually charge interest (and pay it), IRS will frown on the transaction. Just prepare an written note for the loan, with the interest rate and repayment terms on it, and actually pay the loan back - and you need have no more concerns. 3) [I've been deferring my salary since I started the company. Is deferred comp taxable?] In an S-Corporation, if you put wages on the books and don't pay them, yes, the company would get the deduction, and you would report income on your personal tax return. Deferred compensation is rarely a good idea in an S-Corporation. Don't set up salaries until you have the money to pay them. Then, if necessary, pay yourself a higher salary to catch up. This is definitely an area where you want to consult with your own tax advisor. There are some excellent strategies, that I cannot publish in a public forum, that your tax advisor can teach you. 4) [Since an S Corp's taxes pass through to the individual, can losses for a given tax year be applied to gross income earned earlier in the year so as to lessen the tax burden, or are these items somehow dealt with individually?] And this, Margi, is the beauty of the S-Corp. It takes your losses and puts them right back on your tax return. So, yes, it will reduce your total taxable income in the current year. What will it not do? It won't reduce your self-employment income. So, if your previous business had a profit, you will still pay that 15.3% tax on all that profit. However, your overall income taxes will be reduced. What's if your losses are higher than all your sources of income? It's possible that you may have a Net Operating Loss. If you do, you may be able to carry that back for several years and get some immediate refunds. Or you may chose to hang on to it and use it in the future. A good tax advisor can review your financial situation and help you decide which is the better strategy. I hope this helps. Sincerely, Your TaxMama-ga