The tax traps of personally guaranteeing a loan to your corporation
The tax traps of personally guaranteeing a loan to your corporation
If you’re considering guaranteeing, or are asked to guarantee, a loan to your closely held corporation, it’s important to understand the potential tax consequences. Acting as a guarantor, endorser or indemnitor means that if the corporation defaults, you could be responsible for repaying the loan. Without planning ahead, you may face unexpected tax implications.
A business bad debt
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations. A nonbusiness bad debt is deductible only if it’s totally worthless.
To be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this generally shows that the dominant motive for the guarantee is to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee is primarily to protect your investment rather than your job.
Proving the relationship
Except in the case of job guarantees, it may be difficult to show the guarantee is closely related to your trade or business. You have to show that the guarantee is related to your business as a promoter, or that the guarantee is related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
Note: The IRS and courts will scrutinize the dominant motive carefully. Reasonable compensation doesn’t always mean money. It can include protecting employment or business interests.
Additional requirements
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if you meet these three conditions:
- You have a legal duty to make the guaranty payment (although there’s no requirement that a legal action be brought against you).
- The guaranty agreement is entered into before the debt becomes worthless.
- You receive reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only some of the possible tax consequences of guaranteeing a loan to your closely held corporation. Consult with us to learn all the implications and to help ensure the best tax results.
Developing a comprehensive AI strategy for your business
Developing a comprehensive AI strategy for your business
We’ve reached a point where artificial intelligence (AI) offers functionality and enhancements to most businesses. Yours may be able to use it to streamline operations, improve customer interactions or uncover growth opportunities.
However, getting the max benefit calls for doing much more than jumping on the bandwagon. To make this technology truly work for your company, you’ve got to develop a comprehensive AI strategy that aligns with your overall strategic plan.
Identify your needs
Many businesses waste resources, both financial and otherwise, by hastily investing in AI without thoroughly considering whether and how the tools they purchase effectively address specific needs. Before spending anything — or any more — sit down with your leadership team and ask key questions such as:
- What strategic problems are we trying to solve?
- Are there repetitive tasks draining employees’ time and energy?
- Could we use data more effectively to guide business decisions?
The key is to narrow down specific challenges or goals to actionable ways that AI can help. For example, if your staff spends too much time manually sorting and answering relatively straightforward customer inquiries, a simple AI chatbot might ease their workload and free them up for more productive activities. Or if forecasting demand is a struggle, AI-driven analytics may help you develop a clearer picture of future sales opportunities.
Be strategic
As you develop an AI strategy, insist on targeted and scalable investments. In other words, as mentioned, prospective solutions must fulfill specified needs. However, they also need to be able to grow with your business.
In addition, consider whether the AI tools you’re evaluating suit your budget, have reliable support and will integrate well with your current systems. Don’t ignore the tax implications either. The recently passed One, Big, Beautiful Bill Act has enhanced depreciation-related tax breaks that AI software may qualify for if you buy it outright.
Provide proper training
Training is another piece of the puzzle that often goes missing when businesses try to implement AI. Earlier this year, the Pew Research Center published the results of an October 2024 survey of more than 5,200 employed U.S. adults. Although 51% of respondents reported they’d received extra training at work, only 24% of that group said the training was related to AI.
This would seem to indicate that AI-specific training isn’t exactly commonplace. Make sure to build this component into your strategy. Proper training will help ensure a smoother adoption of each tool and increase your odds of a solid return on investment.
As you provide it, also ease employee concerns about job loss or disruption. That same Pew Research Center survey found that 52% of workers who responded are worried about the future impact of AI in the workplace. You may want to help your staff understand how the technology will support their work, not replace it.
Measure and adjust
As is the case with any investment, every AI tool you procure — whether buying it or signing up for a subscription — should deliver results that justify its expense. While shopping for and rolling out a new solution, clearly establish how you’ll measure success. Major factors may include time saved, customer satisfaction and revenue growth.
Once a solution is in place, don’t hesitate to make adjustments if something isn’t working. This may involve providing further training to users or limiting the use of an AI tool until you gain a better understanding of it.
If you’re using a subscription-based solution, you may be able to cancel it early. However, first check the contract terms to determine whether you’d suffer negative consequences such as a substantial termination fee or immediate loss of data.
Account for everything
There’s no doubt that AI has a lot to offer today’s small to midsize businesses. Unfortunately, it can also be overwhelming and financially costly if you’re not careful about choosing and implementing solutions. We can help you develop an AI strategy that accounts for costs, tax impact and return on investment.
Is your business ready for digital documents and e-signatures?
Is your business ready for digital documents and e-signatures?
Whether signing a vendor agreement, approving a repair estimate or applying for a loan, chances are you’ve signed something digitally in recent months. In 2026, digital documents and e-signatures are no longer just a convenience — they’re fast becoming the standard.
Businesses of all types and sizes are embracing digital workflows to improve efficiency, reduce turnaround times and meet customer expectations. If your company is still relying on paper documents and manual signatures, now may be the time to take a fresh look at what you might be missing.
Potential advantages
For small to midsize businesses, there are generally three reasons to use digital documents with e-signatures. First, of course, it’s faster. When you can review and sign a business document electronically, it can be transmitted instantly and approved much more quickly.
And this works both ways: your customers can sign contracts or submit orders for your products or services, and you can sign similar documents with vendors, partners or consultants. What used to take days or even weeks, as delivery services carried out their duties or paper envelopes crisscrossed in the mail, can now occur in a matter of hours.
Second, it’s a strong safeguard against disaster, theft and mishandling. Paper is all too easily destroyed, damaged, lost or stolen. That’s not to say digital documents are impervious to thievery, corruption and deletion. However, a trusted provider should be able to outfit you with software that not only allows you to use digital documents with e-signatures, but also keeps those files encrypted and safe.
Third, as mentioned, more and more customers want it. In fact, this may be the most important reason to incorporate digital documents and e-signatures into your business. Younger generations have come of age using digitized business services. They expect this functionality and may prefer a company that offers it to one that still requires them to put pen to paper.
Valid concerns
Many business owners continue to have valid concerns about digital documents and e-signatures. For example, you may worry about how legally binding a digitized contract or other important document may be. However, e-signatures are now widely used and generally considered lawful under two statutes: 1) the Electronic Signatures in Global and National Commerce Act of 2000, a federal law, and 2) the Uniform Electronic Transactions Act, which governs each state unless a comparable law is in place.
Indeed, every state has legislation in place legalizing e-signatures. There may be some limited exceptions in certain cases, so check with your attorney for specifics if you decide to transition to using the technology.
Another concern you might have is cybersecurity. And there’s no doubt that data breaches are now so common that business owners must expect hacking attempts rather than hope they never happen.
As mentioned, a reputable provider of digital document technology should be able to equip your company with the necessary tools to defend itself. But don’t stop there. If you haven’t already, establish a sound, regularly updated cybersecurity strategy that encompasses every aspect of your business — including when and how digital documents and e-signatures are used.
Strategic move
Implementing this increasingly used technology is a strategic move. As such, it will likely involve costs related to vetting software providers, training your team, and updating internal assets and processes. But it also may be a wise investment in faster transactions, improved security and a better customer experience. Plus, you’ll pay less in express delivery fees. We can help you evaluate the idea, forecast your return on investment, and, if appropriate, build a smooth transition plan that fits your budget and goals.
Why start-ups should consider launching as S corporations
Why start-ups should consider launching as S corporations
Launching a new business brings tough decisions. And that holds true whether you’re a fledgling entrepreneur starting your first company or an experienced businessperson expanding into a second or third enterprise.
Among the most important calls you’ll need to make is how to structure the start-up for tax purposes. For many business owners, electing S corporation status is a savvy move. But it’s not right for everyone. Here are some important points to consider before you decide.
What’s it all about?
An S corporation is a tax election available only to certain U.S. companies. To make the election, you’ll need to file IRS Form 2553, “Election by a Small Business Corporation,” typically within 75 days of forming the business or the start of the tax year to which you want the election to apply.
If you elect S corporation status, the IRS will treat your start-up as a “pass-through” entity. This means the business generally won’t pay federal income taxes. Instead, profits and losses will pass through to your individual tax return and those of other shareholders.
As a result, you’ll avoid the “double taxation” faced by shareholders of C corporations — whereby the company pays taxes on the business’s income and then shareholders pay tax on any dividends received. In addition, S corporation shareholders may be eligible for the Section 199A qualified business income deduction for pass-through entity owners. It was recently made permanent under the One Big Beautiful Bill Act.
Which businesses qualify?
IRS rules limit which companies can elect S corporation status. To qualify, your start-up must:
- Be an eligible domestic corporation or limited liability company (LLC),
- Have no more than 100 shareholders who must be U.S. citizens or residents (certain trusts and estates may also be eligible), and
- Offer only one class of stock.
Insurance companies, financial institutions using the reserve method of accounting and domestic international sales corporations are generally ineligible.
Why do it?
As mentioned above, the main advantage of electing S corporation vs. C corporation status is avoiding double taxation. But there are other reasons to do it.
For example, many start-ups incur losses in their first few years. S corporation status allows owners to offset other income with those losses, a tax benefit that’s unavailable to C corporation shareholders.
S corporations also have advantages over other types of pass-through entities. Generally, all trade or business income that flows through to sole proprietors and partners in partnerships is subject to self-employment taxes — even if the income isn’t actually distributed to the owners. S corporations can divide their income into shareholder-employee salaries and distributions. The salary portion is subject to payroll taxes, but distributions aren’t. So, by drawing a smaller salary (but one that’s reasonable in the eyes of the IRS) and taking the remainder as distributions, S corporation shareholder-employees can reduce their overall tax burden.
Liability protection is another advantage S corporations have over sole proprietorships and partnerships. S corporation status shields shareholders’ personal assets from business debts and legal claims, provided applicable rules are followed. Operating as an S corporation can also make your new business appear more credible to lenders, investors and customers because of its formalized, protective framework.
What are the drawbacks?
Electing to be treated as an S corporation has its drawbacks. Your start-up will have to follow strict IRS rules, which include keeping up with filing requirements and maintaining accurate financial records. Failure to comply could lead to back taxes, interest and penalties. It could even mean losing your S corporation status in a worst-case scenario.
Indeed, S corporations tend to incur higher administrative expenses than other pass-through entities. You’ll need to file corporate tax returns and meet state-level requirements. The extra complexity may outweigh the tax advantages — especially for newly launched companies with little to no profits.
Finally, it bears repeating: Although the salary/distributions income-splitting strategy mentioned above is advantageous, it can draw IRS scrutiny. Paying shareholder-employees an unreasonably low salary to avoid payroll taxes could trigger an audit with negative consequences.
Who can help?
Congratulations and best wishes on your forthcoming start-up! Electing S corporation status may be the right way to go. However, you’ll need to assess a wide variety of factors, including projected profits, the number of shareholders and your comfort level with the administrative requirements.
Before you do anything, contact us. We can help you evaluate whether operating as an S corporation aligns with your strategic and financial goals. If it does, we’d be happy to assist you with the filing process and compliance going forward.
Milestone moments: How age affects certain tax provisions
Milestone moments: How age affects certain tax provisions
They say age is just a number — but in the world of tax law, it’s much more than that. As you move through your life, the IRS treats you differently because key tax rules kick in at specific ages. Here are some important age-related tax milestones for you and loved ones to keep in mind as the years fly by.
Ages 0–23: The kiddie tax
The kiddie tax can potentially apply to your child, grandchild or other loved one until age 24. Specifically, a child or young adult’s unearned income (typically from investments) in excess of the annual threshold is taxed at the parent’s higher marginal federal income tax rates instead of the more favorable rates that would otherwise apply to the young person in question. For 2025, the unearned income threshold is $2,700.
Age 30: Coverdell accounts
If you set up a tax-favored Coverdell Education Savings Account (CESA) for a child or grandchild, the account must be liquidated within 30 days after the individual turns 30 years old. To the extent earnings included in a distribution aren’t used for qualified education expenses, the earnings are subject to tax plus a 10% penalty tax. To avoid that, you can roll over the CESA balance into another CESA set up for a younger loved one.
Age 50: Catch-up contributions
If you’re age 50 or older at end of 2025, you can make an additional catch-up contribution of up to $7,500 to your 401(k) plan, 403(b) plan or 457 plan for a total contribution of up to $31,000 ($23,500 regular contribution plus $7,500 catch-up contribution). This assumes that your plan allows catch-up contributions.
If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $3,500 to your SIMPLE IRA for a total contribution of up to $20,000 ($16,500 regular contribution plus $3,500 catch-up contribution). If your company has 25 or fewer employees, the 2025 maximum catch-up contribution is $3,850.
If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $1,000 to your traditional IRA or Roth IRA, for a total contribution of up to $8,000 ($7,000 regular contribution plus $1,000 catch-up contribution).
Age 55: Early withdrawal penalty from employer plan
If you permanently leave your job for any reason after reaching age 55, you may be able to receive distributions from your former employer’s tax-favored 401(k) plan or 403(b) plan without being socked with the 10% early distribution penalty tax that generally applies to the taxable portion of distributions received before age 59½. This rule doesn’t apply to IRAs.
Age 59½: Early withdrawal penalty from retirement plans
After age 59½, you can receive distributions from all types of tax-favored retirement plans and accounts (IRAs, 401(k) accounts and pensions) without being hit with the 10% early distribution penalty tax. The penalty generally applies to the taxable portion of distributions received before age 59½.
Ages 60–63: Larger catch-up contributions to some employer plans
If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $11,250 to your 401(k) plan, 403(b) plan, or 457 plan. This assumes your plan allows catch-up contributions.
If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $5,250 to your SIMPLE IRA.
Age 73: Required minimum withdrawals
After reaching age 73, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts (traditional IRAs, SEP accounts and 401(k)s) and pay the resulting extra income tax. If you fail to withdraw at least the RMD amount for the year, you can be assessed a penalty tax of up to 25% of the shortfall. However, if you’re still working after reaching age 73 and you don’t own over 5% of your employer’s business, you can postpone taking RMDs from the employer’s plan(s) until after you retire.
Watch the calendar
Keep these important tax milestones in mind for yourself and your loved ones. Knowing these rules can mean the difference between a smart tax strategy and a costly oversight. If you have questions or want more detailed information, contact us.
5 ways businesses can assess health care benefits spending
5 ways businesses can assess health care benefits spending
If your business sponsors health care benefits for its employees, you know the costs of doing so are hardly stable. And unfortunately, the numbers tend to rise much more often than they fall. According to global consultancy Mercer’s Survey on Health & Benefit Strategies for 2026, 51% of large organizations surveyed said they’re likely to make plan design changes to shift more costs to employees next year — presumably in response to price increases.
Small to midsize companies face much the same dilemma. With costs widely anticipated to rise, should you cut benefits, increase the cost-sharing burden on employees or hold steady? There’s no way to know for sure until you assess your current health benefit costs. Here are five ways to ascertain whether you’re spending wisely:
1. Choose and calculate metrics. Business owners can apply analytics to just about everything these days, including health care coverage. For example, you might use benefits utilization rate to identify the percentage of employees who actively use their benefits. Low usage may indicate your benefits aren’t aligned with the particular needs of your workforce.
Another metric is cost per participant, which is generally calculated by dividing total health care spend by number of covered employees. The result can help you judge the efficiency of your budget and potentially allow you to identify cost-saving opportunities.
2. Audit medical claims payments and pharmacy benefits management services. Mistakes happen — and fraud is always a possibility. By regularly re-evaluating claims and pharmacy services, you can identify whether you’re losing money to inaccuracies or even wrongdoing. Your business may need to engage a third-party consultant for this purpose, though some companies might be able to leverage training and specialized software to conduct internal reviews.
3. Scrutinize your pharmacy benefits contract. As the old saying goes, “Everything is negotiable.” Conduct a benchmarking study to see how your business’s pharmacy benefits costs stack up to similarly sized and situated companies. If you believe there’s room for negotiation, ask your vendor for a better deal. Meanwhile, look around the marketplace for other providers. One of them may be able to make a more economical offer.
4. Interact with employees to compare cost to value. The ideal size and shape of your plan depend on the wants and needs of your workforce. Rather than relying on vendor-provided materials, actively manage communications with employees regarding the design of your health care plan and its costs. Determine which benefits are truly valued and which ones aren’t.
Ultimately, your goal is to measure the financial impacts of gaps between benefits offered and those employees actually use. Then, explore feasible ways to adjust your plan design to close these costly gaps.
5. Get input from professional advisors. Particularly for smaller businesses, internal knowledge of health care benefits may be limited. Don’t get locked into the idea that you and your leadership team must go it alone.
Consider engaging a qualified consultant to help you better understand the full range of health care benefits available to your company. Ask your attorney to review your plan for potential compliance violations, as well as to check your contracts for negotiable items. Last, keep our firm in mind. We can perform financial analyses, audit claims, and offer strategic guidance to optimize spending and improve plan efficiency.
Businesses can still choose to address sustainability
Businesses can still choose to address sustainability
For many years, businesses of all shapes and sizes have at least considered sustainability when running their operations. Many people — including customers, investors, employees and job candidates — care about how a company impacts the environment. And reducing energy use, water consumption and waste generally lowers operational costs.
However, the current “environment regarding the environment,” has changed. With the passage of the One, Big, Beautiful Bill Act (OBBBA), the federal government has disincentivized businesses from taking certain green measures. So, you may be reevaluating your company’s stance on sustainability.
Apparent interest
According to one survey, a serious interest in sustainability remains present among many businesses. In February, management consultancy Kearney, in association with climate action media platform We Don’t Have Time, released the results of a survey of more than 500 finance executives from companies in the United States, United Kingdom, United Arab Emirates and India.
Of those respondents, 93% said they saw a clear business case for sustainability. Meanwhile, 92% expected to invest more in sustainability this year — with 62% of respondents saying they planned to allocate more than 2.1% of revenue to sustainability in 2025.
Now whether and how fully these investments come to fruition this year is hard to say. However, the fact remains that sustainability has been and will likely continue to be a strategically significant factor in many industries.
Vanishing tax breaks
As mentioned, the OBBBA has thrown a wrench into tax relief related to certain sustainable measures.
For example, the Section 179D Energy Efficient Commercial Buildings Deduction has been around since 2006. It got a big boost from the Inflation Reduction Act (IRA) of 2022, which increased the potential size of the deduction and expanded the pool of eligible taxpayers. However, the OBBBA permanently eliminates this tax break for buildings or systems on which construction begins after June 30, 2026.
The OBBBA also nixes an incentive for the business use of “clean” vehicles. The Qualified Commercial Clean Vehicle Credit, under Sec. 45W of the tax code, hadn’t been previously scheduled to expire until after 2032. However, it’s now available only for vehicles acquired on or before September 30, 2025. Depending on vehicle weight, the maximum credit is up to $7,500 or $40,000.
Has your company installed an electric vehicle charger or another qualified dispenser of or storage facility for clean-burning fuel? If so, you may be able to claim the Alternative Fuel Vehicle Refueling Property Credit under Sec. 30C of the tax code. The IRA had scheduled the credit — which is worth up to $100,000 per item — to sunset after 2032. But under the OBBBA, eligible property must be placed in service on or before June 30, 2026, to qualify.
Tailored strategy
Where does all this leave your business? Well, naturally, it’s up to you and your leadership team whether you want to address sustainability and, if you decide to do so, precisely how. Typically, when devising or revising a strategy in this area, your company should:
- Conduct an up-to-date baseline assessment of energy use, water consumption, waste generation and your business’s overall carbon footprint,
- Set clear goals and metrics based on reliable data and the input of professional advisors,
- Address the impact of logistics, your supply chain and employee transportation, and
- Communicate effectively with staff to gather feedback and build buy-in.
And don’t necessarily give up on tax incentives. Although some federal tax breaks may be going away in the near future, state and local ones might exist that could benefit your business.
Your call
Again, as a business owner, you get to make the call regarding your company’s philosophy and approach to sustainability. If it’s something you intend to prioritize, we can help you review your operations and identify cost-effective and possibly tax-saving ways to make a positive environmental impact.
A tax guide to choosing the right business entity
A tax guide to choosing the right business entity
One of the most critical decisions entrepreneurs make when starting or restructuring a business is choosing the right entity type. This choice directly impacts how the business is taxed, the level of administrative complexity and regulatory compliance obligations. While legal liability considerations also matter, we will focus on tax implications. For liability advice, consult a legal professional.
Whether launching a new venture or reassessing your current structure, understanding how each entity is taxed can help you make strategic and compliant decisions. Here’s a brief overview of five entities.
1. Sole proprietorship: Simple with full responsibility
A sole proprietorship is the easiest structure to set up. It’s owned and operated by one person and requires minimal administrative effort. Here are the main features:
- Taxation. Income and losses are reported on the owner’s personal tax return on Schedule C of Form 1040. Income is subject to 15.3% federal self-employment tax, and the business itself isn’t taxed separately. The owner may also qualify for a Qualified Business Income (QBI) deduction, potentially reducing the effective tax rate.
- Compliance. Aside from obtaining necessary licenses or a business name registration, there’s little required paperwork. However, the owner is personally liable for all business debts and legal obligations.
2. S Corporation: Pass-through entity with payroll considerations
An S corp is a tax designation offering pass-through taxation benefits while imposing stricter rules. Here are the highlights:
- Taxation. S corps don’t pay income tax at the entity level. Instead, profits or losses are passed through to shareholders via Schedule K-1 and reported on individual returns. A key tax benefit is that shareholders who are employees receive a salary (subject to payroll tax), while additional profit distributions aren’t subject to self-employment tax. However, the salary must be reasonable. The business is eligible for QBI deductions.
- Compliance. To qualify, S corps must have 100 or fewer shareholders, all U.S. citizens or residents, and only one class of stock. They must file Form 2553, issue annual Schedule K-1s and follow corporate formalities like shareholder meetings and recordkeeping. An informational return (Form 1120-S) is also required.
3. Partnership: Collaborative ownership with pass-through taxation
A partnership involves two or more individuals jointly operating a business. Common types include general partnerships, limited partnerships, and limited liability partnerships (LLPs). Here’s what makes it unique:
- Taxation. Partnerships are pass-through entities. The business files Form 1065 (an informational return), and income or loss is distributed to partners on Schedule K-1. Partners report this on their personal returns. General partners must pay self-employment tax, while limited partners usually don’t. The business is eligible for QBI deductions.
- Compliance. Partnerships require a detailed partnership agreement, coordinated recordkeeping and clear profit-sharing arrangements. While more complex than a sole proprietorship, partnerships offer flexibility for growing businesses.
4. Limited liability company: Flexible and customizable
An LLC merges elements of corporations and partnerships, offering owners — called members — both operational flexibility and liability protection.
- Taxation. By default, a single-member LLC is taxed like a sole proprietorship, and a multimember LLC like a partnership. However, LLCs may elect to be taxed as a C or S corp by filing Form 8832 or Form 2553. This gives owners control over their tax strategies. LLCs that don’t elect C corp status are eligible for QBI deductions.
- Compliance. LLCs require articles of organization and often must have an operating agreement. Though not as complex as corporations, they still generally face state-specific compliance requirements and annual filings.
5. C Corporation: Double taxation with scalability
A C corp is a distinct legal entity offering the most liability protection and growth potential through stock issuance. Here are its features:
- Taxation. C corps face double taxation — the business pays taxes on earnings (currently at a 21% federal rate), and shareholders pay taxes again on dividends. However, C corps can offer deductible benefits (for example, health insurance, retirement plans) and retain earnings without immediately distributing profits. C corps aren’t eligible for QBI deductions.
- Compliance: These entities require the most administrative upkeep, including bylaws, annual meetings, board minutes, and extensive state and federal reporting. C corps are ideal for companies seeking venture capital or IPOs.
After hiring employees
Regardless of entity type, adding employees increases compliance requirements. Businesses must obtain an Employer Identification Number (EIN) and withhold federal and state payroll taxes. Employers also take on added responsibilities related to benefits, tax deposits, and employment law compliance.
What’s right for you?
There’s no universal answer to which entity is best. The right choice depends on your growth goals, ownership structure and financial needs. Tax optimization is a critical factor. For example, an LLC electing S corp status may help minimize self-employment taxes if set up properly. Contact us. We can coordinate with your attorney to ensure your structure supports both your tax strategies and business goals.
Is college financial aid taxable? A crash course for families
Is college financial aid taxable? A crash course for families
College can be expensive. According to the College Board, the average sticker price for tuition and fees at private colleges was $43,350 for the 2024–2025 school year. The average cost for tuition and fees for out-of-state students at public colleges was $30,780. For in-state students, the cost was $11,610. Of course, there are additional costs for housing, food, books, supplies, transportation and incidentals that can add thousands to the total.
Fortunately, a surprisingly high percentage of students at many schools receive at least some financial aid, and your child’s chances may be better than you think. So, if your child cashes in on some financial aid, what are the tax implications? Here’s what you need to know.
The basics
The economic characteristics of what’s described as financial aid determine how it’s treated for federal income tax purposes.
Gift aid, which is money the student doesn’t have to work for, is often tax-free. Gift aid may be called a scholarship, fellowship, grant, tuition discount or tuition reduction.
Most gift aid is tax-free
Free-money scholarships, fellowships and grants are generally awarded based on either financial need or academic merit. Such gift aid is nontaxable as long as:
- The recipient is a degree candidate, including a graduate degree candidate.
- The funds are designated for tuition and related expenses (including books and supplies) or they’re unrestricted and aren’t specifically designated for some other purpose — like room and board.
- The recipient can show that tuition and related expenses equaled or exceeded the payments. To pass this test, the student must incur enough of those expenses within the time frame for which the aid is awarded.
If gift aid exceeds tuition and related expenses, the excess is taxable income to the student.
Tuition discounts are also tax-free
Gift aid that comes directly from the university is often called a tuition discount, tuition reduction or university grant. These free-money awards fall under the same tax rules that apply to other free-money scholarships, fellowships and grants.
Payments for work-study programs generally are taxable
Arrangements that require the student to work in exchange for money are sometimes called scholarships or fellowships, but those are misnomers. Whatever payments for work are called, they’re considered compensation from employment and must be reported as income on the student’s federal tax return. As explained below, however, this doesn’t necessarily mean the student will actually owe any tax.
Under such arrangements, the student is required to teach, do research, work in the cafeteria or perform other jobs. The college or financial aid payer should determine the taxable payments and report them to the student on Form W-2 (if the student is treated as an employee) or Form 1099-MISC (if the student is treated as an independent contractor).
Taxable income doesn’t necessarily trigger taxes
Receiving taxable financial aid doesn’t necessarily mean owing much or anything to the federal government. Here’s why: A student who isn’t a dependent can offset taxable income with the standard deduction, which is $15,000 for 2025 for an unmarried individual. If the student is a dependent, the standard deduction is the greater of 1) $1,350 or 2) earned income + $450, not to exceed $15,000. The student may have earned income from work at school or work during summer vacation and school breaks. Taxable financial aid in excess of what can be offset by the student’s standard deduction will probably be taxed at a federal rate of only 10% or 12%.
Finally, if you don’t claim your child as a dependent on your federal income tax return, he or she can probably reduce or eliminate any federal income tax bill by claiming the American Opportunity Tax Credit (worth up to $2,500 per year for the first four years of undergraduate study) or the Lifetime Learning Credit (worth up to $2,000 per year for years when the American Opportunity credit is unavailable).
Avoid surprises at tax time
As you can see, most financial aid is tax-free, though it’s possible it could be taxable. To avoid surprises, consult with us to learn what’s taxable and what’s not.
Lower your self-employment tax bill by switching to an S corporation
Lower your self-employment tax bill by switching to an S corporation
If you own an unincorporated small business, you may be frustrated with high self-employment (SE) tax bills. One way to lower your SE tax liability is to convert your business to an S corporation.
SE tax basics
Sole proprietorship income, as well as partnership income that flows through to partners (except certain limited partners), is subject to SE tax. These rules also apply to single-member LLCs that are treated as sole proprietorships for federal tax purposes and multi-member LLCs that are treated as partnerships for federal tax purposes.
In 2025, the maximum federal SE tax rate of 15.3% hits the first $176,100 of net SE income. That includes 12.4% for the Social Security tax and 2.9% for the Medicare tax. Together, we’ll refer to them as federal employment taxes.
The rate drops after SE income hits $176,100 because the Social Security component goes away above the Social Security tax ceiling of $176,100 for 2025. But the Medicare tax continues to accrue at a 2.9% rate, and then increases to 3.8% at higher income levels because of the 0.9% additional Medicare tax. This 0.9% tax applies when wages and SE income exceed $200,000 for singles and heads of households, $250,000 for married couples filing jointly and $125,000 for married couples filing separately.
Tax reduction strategy
To lower your SE tax bill, consider converting your unincorporated small business into an S corp and then paying yourself (and any other shareholder-employees) a modest salary. Distribute most (or all) of the remaining corporate cash flow to the shareholder-employee(s) as federal-employment-tax-free distributions.
S corp taxable income passed through to a shareholder-employee and S corp cash distributions paid to a shareholder-employee aren’t subject to federal employment taxes. Only wages paid to shareholder-employees are subject to them. This favorable tax treatment places S corps in a potentially more favorable position than businesses conducted as sole proprietorships, partnerships or LLCs.
The caveats
However, this strategy isn’t right for every business. Here are some considerations:
1. Operating as an S corp and paying yourself a modest salary saves SE tax, but the salary must be reasonable. Otherwise, you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties.
You can minimize that risk if you gather objective market evidence to demonstrate that outsiders could be hired to perform the same work for salaries equal to what you’re paying.
2. A potentially unfavorable side effect of paying modest salaries to an S corp shareholder-employee is that it can reduce your ability to make deductible contributions to tax-favored retirement accounts. If the S corp maintains a SEP or traditional profit-sharing plan, the maximum annual deductible contribution for each shareholder-employee is limited to 25% of his or her salary.
So, the lower the salary, the lower the maximum contribution. However, if the S corp sets up a 401(k) plan, paying modest salaries won’t preclude generous contributions.
3. Operating as an S corp requires extra administrative hassle. For example, you must file a separate federal return (and possibly a state return).
In addition, you must scrutinize transactions between S corps and shareholders for potential tax consequences, including any transfers of assets from an existing sole proprietorship or partnership to the new S corp. State-law corporation requirements, such as conducting board meetings and keeping minutes, must be respected.
Mechanics of converting
To convert an existing sole proprietorship or partnership to an S corp, a corporation must be formed under applicable state law, and business assets must be contributed to the new corporation. Then, an S election must be made for the new corporation by a separate form with the IRS by no later than March 15 of the calendar year, if you want the business to be treated as an S corp for that year.
Suppose you currently operate your business as a domestic LLC. In that case, it generally isn’t necessary to go through the legal step of incorporation to convert the LLC into an entity that will be treated as an S corp for federal tax purposes. The reason is because the IRS allows a single-member LLC or multi-member LLC that otherwise meets the S corp qualification rules to simply elect S corporation status by filing a form with the IRS. However, if you want your LLC to be treated as an S corp for the calendar year, you also must complete this paperwork by no later than March 15 of the year.
Weighing the upsides and downsides
Converting an existing unincorporated business into an S corp to reduce federal employment taxes can be a wise tax move under the right circumstances. That said, consult with us so we can examine all implications before making the switch.