S corp savings vs sole Prop

[ptax255]

Hi, am I missing anything major with the calculations below? Sole prop looking to convert to S corp. Thanks!

	Sole Prop	S Corp
Net income	$111,835.00	$36,835.00
Wages	$0.00	$75,000.00
SE tax deduction	$7,850.00	$5,738.00
QBI Deduction	$7,375.00	$7,367.00
Solo 401K deduction	$43,151.00	$41,250.00
Income Tax	$18,710.65	$20,118.00
SS+Medicare	$15,699.00	$11,476.00
CA S corp tax	0	$2,177.53
Total tax	$34,409.65	$33,771.53	$638.12	Savings

[Strongsilence-CPA]

CA tax is 1.5% X net income. I don't know how you get $2,177. Maybe you are not showing CA adjustments from Federal.

QBI deduction looks right (if there is no capital gain income.)

[TaxGuyBill]

I haven't analyzed your numbers, but at first glance it looks reasonable.

Based on your numbers, I certainly hope he doesn't elect to be taxed as a S-corporation.  The costs to file the 1120-S, 941s, 940, W-2, pay unemployment, and reduced potential Social Security benefits would make the S-election seem like a bad idea.

[Strongsilence-CPA]

Payroll processing costs

Legal fees for incorporation

Costs for another tax return, annually

Your fees for guidance and CAS related to reasonable compensation, health insurance, accountable plans and other S Corp matters

[qbteachmt]

Agree with TGB, unless there already are employees (but you listed Solo 401(k)). Also, this affects office in home deduction, vehicle mileage allowance, meals and lodging provisions; there are some ">2% shareholder" limitations and ">10% shareholder" limitations. They already get a benefit from health care premiums (so that's a wash). If that income isn't a nice, regular, feed, then S Corp management really is difficult by comparison to SP.

[abctax55]

And the CA 1.5% is 'inclusive' of the $ 800.00 minimum tax, so it doesn't kick in until CA NI is more than $ 53,333.

[Strongsilence-CPA]

The PTE deduction is another factor and might be a significant benefit.

[ptax255]

Isn't $800 the minimum to be paid? Also if I'm not mistaken it's waived for first year? I'm also including as CA tax 1.1% SDI on wages.

[ptax255]

Agreed. I didn't inlcude it because for 2024 election, payment had to be made by June.

[ptax255]

Thank you! Fair point with home office deduction. As a sole prop it's about $22K, which wouldn't be reasonable as S corp.

[George4Tacks]

Also take into account how much liability insurance you can buy, without all the paperwork overhead, to get the protection you might be looking for as an S-Corp. 

[abctax55]

"...Also if I'm not mistaken it's waived for first year? "

Are you planning for just one year, or for multiple? 

And CA tax of $ 2177 would mean income of  $ 145,134 - which is way more than your projections show.

[ptax255]

Multiple years, but I'm also trying to determine if client should make a retroactive 2024 election, or start in 2025. By showing 2024 savings, I think 2025 and later would be greater due to PTE (pending any tax law changes of course). Additional CA tax for 2024 then would just be 1.1% SDI.

[TaxGuyBill]

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@ptax255 wrote:

I'm also trying to determine if client should make a retroactive 2024 election, or start in 2025.

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Why would the client want to do it AT ALL?    Based on your numbers, after the increased tax preparation/payroll fees and paying Unemployment, they likely will be paying MORE money.  Plus they will reduce their future potential Social Security benefits.

Even if it was a good idea (which at first glance it seems like a very bad idea):

• Is this already an LLC?  Did you already factor in the CA franchise tax for the LLC?
• What makes you think it qualifies for the late election?  You can't arbitrarily decide to make the election after the due date.

[qbteachmt]

"with home office deduction. As a sole prop it's about $22K"

Whew! cough-cough. I just choked on my coffee while reading this.

[ptax255]

Spoiler

That northern CA kind of mortgage, taxes etc

[qbteachmt]

Point being, doesn't $22K kind of settle the issue to that side?

[PATAX]

Based on what you have provided and on what the others have said, it doesn't look like there's much of an advantage to change. Don't forget that S corporations that do not pay what is deemed as reasonable compensation are prone to IRS audit, which could lead to a full audit. Audits are expensive and nerve-racking to the client, even if it is eventually  a no change audit. If the client wants limited liability, can you become a sole member LLC/disregarded entity?

[ptax255]

Wouldn't the amount be the same at $22k as S corp under an accountable plan?

[qbteachmt]

"under an accountable plan?"

Maybe. I found this for you:

https://accountants.intuit.com/articles/home-office-deductions-expenses/

[ptax255]

Updated based on everyone's feedback. Thanks! Curious, what amount do you all think it's worth all the extra work of an S corp?

	Sole Prop	S Corp
Net income	$111,835.00	$36,835.00
Wages	$0.00	$75,000.00
SE tax deduction	$7,850.00	$5,738.00
QBI Deduction	$7,375.00	$6,681.87
Solo 401K deduction	$43,151.00	$41,250.00
CA Tax deduction		$1,625.00
PTE		$3,425.66
Income Tax	$18,710.65	$18,590.07
SS+Medicare	$15,699.00	$11,476.00
CA S corp tax	0	$1,625.00
Total tax	$34,409.65	$31,691.07	$2,718.58	Savings

[Strongsilence-CPA]

I don't have an opinion on the amount that makes it worth it.

I advise running several scenarios of nontaxable distributions vs. wages then analyzing those outcomes before making a decision.  Maybe consider 2024 and 2025 if possible.

And, as someone noted earlier, there are impacts on Social Security for different wage amounts. 

It's complicated right, but I think the timing principle is a big consideration:  Does the client save taxes now (and take advantage of that savings with investing it prudently) in order to defer taxes much later?

[Strongsilence-CPA]

22K of home expenses deducted!  How is an S Corp accountable plan able to deduct 22K but a Sole Proprietorship can't deduct 22K?