My wife has a nickname for me. She calls me “Mr. B-Side” because I usually like the experimental song on the side of a 45 record better than those on the single or “A-Side.”
For the younger members of the audience, back in my day, when a band released a single on a 7-inch record (or a 45), the A-side was the main single, while the “B” or flip side of the record was usually the throwaway song, or the one that was more experimental.
This now brings me to taxes.
Last January, I, along with three other accountants, was asked to speak before a group of business owners. Before we started, we all got together to discuss what we would speak on. I volunteered to talk about revoking an S-election and becoming a C-corporation. These others told me, literally, that I was crazy.
“What about double taxation?” they retorted. One said, “With the 20 percent deduction on pass-throughs, why would you put your clients in a bad situation?” She also stated that she and her team did the math, and converting was not only crazy, it was stupid. I didn’t respond to that comment, but I thought to myself, well, your team sucks.
As you are reading this, you might think I’m crazy too, but I’m about to prove you wrong.
First of all, the IRC §199A deduction is misleading. It comes below the line, meaning it has no effect on adjusted gross income (AGI). Then there are AGI limitations, which can be circumvented by salaries paid to shareholders.
So, in effect, we have to increase the salaries of S-corporation owners, who were already taking reasonable compensation. This causes them to pay 15.3 percent on the extra money, which is more then the IRC §199A deduction would yield.
Let’s add more fuel to the fire. The IRS just issued guidance stating if a company converted from an S- to a C-corporation, they can take tax-free distributions for two years for previously taxed income. So there goes double taxation. Furthermore, if you own more than two percent of an S-corporation, you can’t take fringe benefits. In fact, you can’t even deduct health insurance, much less a Health Reimbursement Account (HRA).
Here’s where I prove my point: I do tax planning for my clients. And believe me, they were nervous like the other accountants. However, I just completed my year-end analysis, and guess what? I saved one individual $2.5 million with the conversion. In fact, every client I did planning for saved hundreds of thousands in tax dollars, just by revoking an S-election.
The problem is the profession itself: Accounting is incredibly conservative. I am shocked when I read articles about the cloud, automation and going paperless. Wake up! There is a better and different way of doing things.
“Mr. B-Side” gets up at 4:30 am. After I’ve had my coffee, I spend at least two hours reading Tax Court cases and new IRS regulations. My hobby is learning about taxes. I just happen to get paid for it.
The point is, don’t be afraid to think outside the box. Let them call you crazy. Let them not understand. That is on them. My clients are extremely happy, and they pay me a lot of money.
Accounting is extremely conservative. Don’t be. Rip the system. You don’t always have to be right to be right.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...