Cream of the Crop 1/Cream of the Crop 1.iso/BUSINESS/SBA62.ARJ/FSBA.EXE/F302.SBE

Text File | 1992-04-30 | 38KB | 961 lines

@Q01

             ┌───────────────────────────────────────────┐
             │   TO INCORPORATE OR NOT TO INCORPORATE:   │
             │          THE PERENNIAL QUESTION           │
             └───────────────────────────────────────────┘

  Please enter the name of your business (or proposed business):

@TX
01\Q02

@Q02

  QUESTION:  Is this a business that you have already started
             (or acquired)?

@YN
01\Q03
02\Q10

@Q03

  QUESTION:  If you were to sell your business (or the stock of your
             incorporated business) today for its fair value, how
             much of a taxable gain or a loss would you have on the
             sale?  (Make your best guess.)

              .  1 - A gain of over $1 million
              .  2 - A gain of $500,000 to $1 million
              .  3 - A gain of $100,000 to $500,000
              .  4 - A gain of $50,000 to $100,000
              .  5 - A gain of about $0 to $50,000
              .  6 - Breakeven, more or less
              .  7 - A loss of less than $50,000
              .  8 - A loss of $50,000 to $150,000
              .  9 - A loss in excess of $150,000

@MC\09
01\Q04
02\Q04
03\Q04
04\Q04
05\Q04
06\Q04
07\Q04
08\Q04
09\Q04

@Q04

  QUESTION:  Is the business in question already incorporated?

@YN
01\Q05
02\Q10

@Q05


  QUESTION:  Is the corporation an "S corporation"?

@YN
01\Q06
02\Q22

@Q22

  NET OPERATING LOSS OR TAX CREDIT CARRYOVERS:  A C corporation
  that incurs net operating losses or has more tax credits than
  it can use in the current tax year can generally carry the
  losses or unused tax credits back to any of its 3 preceding
  tax years, to obtain refunds of taxes paid in those years.
  However, for a new corporation, or one that has no profitable
  prior years to carry losses or credits back to,  there is no
  other choice but to carry the net operating losses (NOL's) or
  credits over to future years, in the hope that it will eventually
  have taxable income against which the NOL or credit carryovers
  can be offset, reducing taxes in those future years.  (Most NOL's
  or unused tax credits can be carried forward for up to 15 tax
  years after the year incurred.)


    QUESTION:  Does your C corporation have substantial unused net
               operating loss or tax credit carryovers at present?

@YN
01\Q06
02\Q06

@Q06

  TAX LOSSES: Startup losses incurred by a regular ("C") corpora-
  tion cannot be passed through to shareholders, but must be
  carried forward until (if ever) they can be used to offset fu-
  ture taxable income of the corporation....And a more-than-50%
  change in stock ownership of the corporation can severely reduce
  the corporation's right to use a large part of any such tax loss
  carryovers.

  An S corporation election can be very useful in the early stages
  of a business if it is losing money, due to the fact that the
  losses an S corporation incurs can be "passed through" to its
  shareholders and, in many cases, deducted on their individual
  tax returns.  An S corporation can also pass through certain
  tax credits, such as the targeted jobs credit and various other
  business credits, which might not be utilized currently in a C
  corporation that has little or no net taxable income.

  QUESTION:  Is your corporation generating tax losses (or do you
             expect it to) in amounts you consider substantial?
@YN
01\Q21
02\Q07

@Q21

  The usability of your corporation's tax losses, even if it is
  an S corporation, depends upon whether those losses (and/or tax
  credits) can be passed through and utilized by the stockholders.
  Thus, such losses may not flow through to your individual tax
  return if, for instance, they are "passive activity" losses;
  you or the S corporation are not considered "at-risk" with re-
  spect to the losses; or you lack sufficient "tax basis" in your
  S corporation stock to utilize any further losses.  Or, even if
  the losses or credits flow through to your individual return,
  you may not be able to use them currently, due to insufficient
  taxable income of your own in the current year (or preceding 3
  years) against which the losses can be applied, or else credits
  may not be usable by you due to such factors as the alternative
  minimum tax (AMT).

    QUESTION:  To the best of your knowledge (only your tax
               adviser can tell you for sure about this one),
               do you think you could utilize your corporation's
               tax losses if it is an S corporation?
@YN
01\Q12
02\Q12

@Q07

  QUESTION:  How much annual PRE-TAX profit do you expect the
             corporation to earn each year in the near future
             (assuming you limit owner salaries to no more
             than $100,000 a year per owner, as a maximum) ?

             .  1 - None:  We expect to have losses, or very
                    minimal net profits, under $10,000 (as
                    defined above)
             .  2 - Between $10,000 and $100,000 profit (as
                    defined above)
             .  3 - Between $100,000 and $335,000 profit (as
                    defined above)
             .  4 - Over $335,000 pre-tax profit (as defined
                    above)

@MC\04
01\Q12
02\Q12
03\Q12
04\Q12

@Q10

  TAX LOSSES:  Start-up or other losses or tax credits earned by
  an unincorporated business (a sole proprietorship or partnership)
  can generally be passed through to the owner or owners, to be
  claimed on their individual income tax returns.  (Unless the
  deductions or credits are suspended due to at-risk or passive
  activity loss rules, or on account of insufficient tax basis.)
  Such losses or credits cannot be used if the legal form of the
  business is a C corporation, but must instead be carried over
  to another year in which the corporation has taxable income.

    QUESTION:  Will your business generate tax losses or tax
               credits in the next tax year (or two), in amounts
               that you consider substantial?

@YN
01\Q12
02\Q11

@Q11

  QUESTION:  How much pre-tax profit (per owner, if more
             than one owner) do you expect the business to
             earn, on average, for the next few years
             (assuming the business is not incorporated)?

             .  1 - None:  We expect to have losses, or not
                    over $50,000 profit (as defined above)
             .  2 - Between $50,000 and $100,000 profit (as
                    defined above)
             .  3 - Between $100,000 and $335,000 profit (as
                    defined above)
             .  4 - Over $335,000 pre-tax profit (as defined
                    above)

@MC\04
01\Q12
02\Q12
03\Q12
04\Q12

@Q12

  Medical insurance, medical reimbursement plan expenses, and
  other "fringe benefits" such as disability insurance and group-
  term life insurance are generally not deductible expenses for
  owners of unincorporated business or shareholders (owning 2% of
  the stock or more) of S corporations.  By contrast, a C corpor-
  ation that pays for such benefits for its employees, including
  owner-employees, is generally able to deduct such expenses,
  with the value of such coverage generally NOT being taxable to
  the employees (except for the value of group-term life insurance
  coverage in excess of $50,000 for a given employee).

  QUESTION:  Do you (or does your business) plan to purchase
             medical coverage, disability insurance or group-
             term life insurance for you or the other owners
             of the business?

@YN
01\Q20
02\Q20

@Q20

  DIVIDENDS-RECEIVED DEDUCTION.  A C corporation may sometimes be
  used advantageously to hold dividend-paying stocks, since the
  federal tax law allows the corporation to avoid paying tax on 70%
  of the dividends it receives (80% if your company owns 20% or
  more of the stock of the company paying the dividends).  This
  deduction is NOT allowed to an S corporation that gets dividends.
  Putting securities in your corporation is not always a wise idea,
  however, despite the 70% dividends-received deduction.  Taking
  the stocks (or proceeds from their sale) back out of your corpor-
  ation can result in taxable gains at the corporate level and divi-
  dend or taxable gain to you as a shareholder, to the extent of the
  value of whatever you take out of the corporation.  Thus, it can
  be quite costly if the situation changes and you take the stock
  back out of the corporation.

  QUESTION:  If you have significant dividend income from stocks,
             and in light of the foregoing discussion, would you be
             likely to benefit from the dividends-received deduction
             if your business, as a C corporation, held stocks?
@YN
01\Q13
02\Q13

@Q13

  QUALIFIED PERSONAL SERVICE CORPORATIONS:  Certain personal
  service businesses, if incorporated and engaged in rendering
  services in certain fields such as law, health, accounting,
  actuarial sciences, architecture, engineering, performing arts
  or consulting, are considered "QUALIFIED personal service
  corporations." ("QPSC") (If substantially all of the stock is
  owned by employees or retired employees, etc.)  Note that this
  definition is slightly different from the definition of "PERSONAL
  SERVICE CORPORATIONS" that applies to determine a corporation's
  permissible tax year and tax accounting method.

  A "QPSC" is taxed at a higher tax rate, generally (34% flat
  rate), than other C corporations (whose tax rates start at 15%).
  Obviously, this can be a major disadvantage of being a QPSC.

  QUESTION:  To the best of your knowledge (we realize this is a
             VERY technical definition), is your business one that
             will be considered a QPSC, if operated as a corporation?

@YN
01\Q14
02\Q14

@Q14

  PENSION PLANS:  Both incorporated and unincorporated busi-
  nesses may maintain qualified pension or profit-sharing plans,
  and the limits on contributions, benefits, etc., are now roughly
  the same for corporate, Sub S and Keogh (non-corporate) retire-
  ment plans.  There are a few differences that remain, however,
  despite the "parity" rules that generally put corporate and non-
  corporate plans on an equal footing in 1984.


     QUESTION:  Does (or will) your business maintain qualified
                pension and/or profit-sharing plans for the
                owners and employees?

@YN
01\Q15
01\Q16

@Q15

  BORROWING FROM YOUR PENSION PLAN:  The tax law allows a par-
  ticipant in a qualified pension or profit sharing plan, in
  some cases, to borrow against his or her account in the pension
  or profit sharing plan, up to as much as $50,000 in some cases.
  But such borrowing is effectively prohibited in the case of
  certain types of qualified pension or profit sharing plans.

    QUESTION:  How important, on a scale of 1 to 5 (with 5 being
               most important, 1 being least), is the ability to
               borrow from your company's pension plan to you (or
               to your co-owners in the business)?

@MC\05
01\Q16
02\Q16
03\Q16
04\Q16
05\Q16

@Q16

  LIMITED LIABILITY.  One reason many businesses incorporate is
  to limit the liability of the owners, in the event the business
  fails.  However, for most small businesses, lenders will usual-
  ly require that the shareholders of a corporation personally
  guarantee repayment of any loans made to the corporation, since
  the lender is looking primarily to the owners, rather than the
  assets of the corporation itself, for security.

  Thus, for many types of liabilities typically incurred by a
  small or medium-sized business, incorporation will not serve
  to limit the owners' liability if the business bellies up--except
  against unsecured creditors, such as vendors who have extended
  credit to the business.

    QUESTION:  How important to your business is the ability to
               limit liability by incorporating (on a scale from
               1 to 5, with 5 being VERY important)?

@MC\05
01\Q17
02\Q17
03\Q17
04\Q17
05\Q17

@Q17

  PERSONAL HOLDING COMPANY STATUS:  If your business derives 60%
  or more of its "adjusted ordinary gross income" from certain types
  of income, such as rents, royalties, interest or dividends, and
  operates as a C corporation, any net income that it fails to dis-
  tribute as dividends to its shareholders may be subject to a federal
  "personal holding company tax" of 28%, at the corporate level.  This
  penalty tax does NOT apply to an unincorporated business or to an S
  corporation; nor to a C corporation unless over 50% of the stock is
  held (directly or indirectly) by five or fewer people.

  (A company with 50% or more of its "ordinary gross income" from
  a single passive category, such as rents, mineral/oil/gas royal-
  ties, copyright royalties, produced film rents, or active business
  computer software royalties, MAY be able to avoid personal holding
  company status if various other technical requirements are met.)

  QUESTION:  Based on the brief description above, do you believe
             your business will be a "Personal Holding Company" if
             operated as a C corporation?
@YN
01\Q18
02\Q18

@Q18

_______________________________________________________________________

@BR\18
01\Q19

@Q19

@STOP
@RD\01

  RECOMMENDATIONS:  Based on your responses to the foregoing
  questions, the "EXPERT" has come to a tentative conclusion as
  to which legal form of business appears most advisable in your
  particular situation.  (See below.)

  CAUTION:  The following recommendation has been arrived at by
  weighing and assigning points to various known factors regard-
  ing your business, in an algorithm that attempts to quantify
  the unquantifiable.  Since there are always numerous pros and
  cons in evaluating the optimum choice of legal entity, the
  process used by the program is a lot like comparing 3 oranges
  with 2 apples and concluding which is better.

  Accordingly, you should not regard the following recommendation
  as a definitive judgment, since it involves some very subjective
  choices and conclusions by the author of the program, and is
  also based on far less than complete information about your
  situation.  However, it does represent an serious attempt to
  model the thought processes the author, an attorney and CPA,
  would go through in advising a client as to choice of legal
  entity, based on the key facts elicited from you.  Just remember
  that, in making "fuzzy" decisions of this type, no computer pro-
  gram is an adequate substitute for the considered judgment of a
  competent, experienced, and intuitive professional adviser with
  a full grasp of the facts and circumstances relating to you and
  your business.

       RECOMMENDATION AS TO FORM OF BUSINESS:

     |VAR|

@RD\02

  RECOMMENDATIONS:  Based on your responses to the foregoing
  question and answer session, the program is unable to identify
  any clear "Best" choice of legal entity for your business.  While
  various weightings have been given to each of the three basic
  entity choices (unincorporated entity, C corporation and S cor-
  poration), and points assigned to each alternative, based on the
  largely subjective rating system devised for this program, there
  does not appear to be any clearly preferable entity choice in
  this case.

  However, for your consideration, we have provided the scores
  developed in our internal system of analysis.  These numbers
  have no real meaning, and essentially represent an attempt to
  quantify our "hunches" about the optimum legal entity for your
  situation, based on the limited data we have on your business.

  (Note that there is |VAR| difference in the scores we devel-
  oped, for the first- and second-best choices.  Since there is a
  considerable lack of precision in our "fuzzy logic" methodology
  on which these scores are based, this one is definitely too
  close to call.)

@RD\03

  More useful, in our opinion, will be your consideration of the
  various pros and cons of incorporation vs. not, C corporation
  vs. S corporation, etc., which are listed below, all of which
  are derived from our analysis of what you have told us about
  your particular company.

@RD\04
   . Operating in unincorporated form is, to begin with, often much
     simpler and less costly administratively than as a corporation.
@RD\05
     And, as you have probably already learned from experience,
     operating as an S corporation is even more complicated than
     as a regular C corporation, due to the complexity of the tax
     laws governing S corporations and the need for expert account-
     ing and tax help to maintain the S corporation properly.

@RD\06
   . Since your business expects to incur substantial operating
     losses for awhile, being unincorporated would give you a
     better chance to derive some current tax benefit from those
     losses, providing you (or your co-owners, if any) can person-
     ally utilize the losses or tax credits generated.  As a C
     corporation, by contrast, any such losses (or tax credits)
     could not be utilized currently (by the corporation or by you),
     |VAR|.
     (An S corporation, of course, could generally pass through any
     such operating losses to the owner(s), much the same as an un-
     incorporated business.)

@RD\07
   . From the responses you have given, it appears that it could
     be advisable to consider liquidating your corporation, and
     recognizing a substantial tax loss on the liquidation of your
     stock.  Of course, if the loss is treated as a capital loss,
     you will only be able to deduct $3,000 a year against your
     other income (unless you have capital gains the loss could
     offset).  However, if your stock is eligible for "Section
     1244 Stock" treatment, you may be able to treat the first
     $50,000 ($100,000 on a joint return) of any loss on liquida-
     tion as an ORDINARY loss, which ought to be fully deductible
     in many cases.  (There are a number of technical qualifications
     in order to actually take such a loss, so consult a good tax
     adviser before concluding that you ought to liquidate your
     corporation, |VAR|.)

@RD\08
   . You may want to liquidate your C corporation and operate as
     a sole proprietorship or partnership, or else elect S corpor-
     ation status, in order to avoid high marginal corporation tax
     rates, which it appears in this case would be |VAR| (Federal),
     compared to marginal tax rates of about 31-33% if the business
     income were taxed at individual income tax rates, rather than
     C corporation rates.  (However, there might be significant
     taxes to recognize, by the corporation upon any such liquida-
     tion, so electing S corporation status may be a better tactic.)

@RD\09
   . It appears that at your company's level of profitability, a C
     corporation would probably be in a marginal income tax bracket
     of |VAR|.  Thus an unincorporated business would probably
     save some current federal income taxes, since individuals are
     taxed at federal income tax rates of no more than about 31% to
     33%, as a general rule.

@RD\10
   . An unincorporated business will also save on Federal and
     state unemployment taxes on the earnings of the owners, since
     as owner-employees of a corporation, unemployment taxes would
     apply to wages or salary paid to the owner--but no such tax
     applies to the business earnings of a partner in a partnership
     or to a sole proprietor, who take a "draw" rather than salary
     or wages.

   . Unincorporated businesses do not have to be concerned with
     the possible double taxation of profits, unlike C corpora-
     tions (and, to a lesser extent, some S corporations).

   . An unincorporated business does not have to be concerned
     with either of the corporate penalty taxes, the personal
     holding company tax or the accumulated earnings tax, both
     of which apply only to C corporations.

@RD\11
   . One other important benefit of starting out a business in
     unincorporated form is increased flexibility, from a tax
     standpoint.  An unincorporated business can always incorpor-
     ate, but if you have already incorporated, liquidating in
     order to dis-incorporate can give rise to potentially huge
     capital gains taxes.

@RD\12
   . Operating as a C corporation can be a real drawback in the
     case of your business, since you have indicated that your
     particular type of business is one that may be considered a
     Personal Holding Company.  If so, and you are unable to zero
     out its income each year through salary payments or other
     operating expenses, you could be in the grim situation of
     incurring double taxation on the corporation's net income.
     That is, not only would the corporation pay tax on its pre-
     tax income, but there would also be a second tax on the
     remaining after-tax net income:  either the 28% personal
     holding company tax, or, if all the after-tax net income is
     paid out as dividends to the shareholders, individual income
     tax on the dividend payments.  This is not a problem if you
     operate the business in unincorporated form, or as an S
     corporation.

@RD\13
   . Perhaps the most common and pervasive reason for a business
     to be incorporated is to achieve some degree of limited
     liability.  While such limited liability may not be absolute,
     particularly where creditors of the corporation, lessors,
     etc., require the owners of the corporation to personally
     guarantee repayment of corporate loans or leases, limited
     liability is still generally an advantage of incorporating.
@RD\14
     You have indicated that limited liability is VERY important in
     the case of |VAR|.

@RD\15
     You have indicated, however, that limited liability is NOT very
     important for |VAR|.

@RD\16
   . Liquidating a corporation where there is a taxable gain on the
     transaction can be costly, particularly since it is often dif-
     ficult to determine the fair value of a going concern (and
     since the IRS may argue that your taxable gain is much larger
     than you thought it was).  Since you have indicated that you
     would probably have a substantial gain on liquidation of your
     existing corporation, the resulting tax liability you would
     personally incur is one good reason NOT to dis-incorporate by
     liquidating.  Also, the corporation itself may incur addition-
     al tax upon any liquidation if it holds assets (including
     intangibles like "goodwill" that may not even be on its books)
     that have a value in excess of their tax basis.

@RD\17
   . Because you have indicated your business is incurring opera-
     ting losses, an S corporation would have advantages for you,
     as compared to a C corporation, since some or all of such
     corporate tax losses may be "passed through" to you as a
     shareholders, and thus should be currently utilizable by you
     in reducing your personal income tax liability.  By contrast,
     startup losses incurred by a corporation cannot be used to
     offset income, unless carried over and used to reduce the cor-
     poration's taxable income in future years, when (or if) the
     corporation eventually becomes profitable.  A deduction today
     is usually worth more than a possible deduction some years in
     the future.

@RD\18
   . For a business operating at an annual profit level of less
     than $100,000 or so (after owners' salaries), a C corporation
     may provide an income-splitting opportunity which can reduce,
     or at least defer, overall taxes.  This can be done by leaving
     some profit (under $75,000 a year, preferably) in the C cor-
     poration, shifting such income out of the owners' 28% or 31%
     tax brackets into the lower corporate tax brackets of 15% on
     the first $50,000 and 25% on the next $25,000 of corporate
     taxable income.  This won't work if the corporation is a
     "qualified personal service corporation," which is subject
     to tax at a flat rate of 34% on all its net income.  But you
     have indicated that the business may have profits of less than
     $100,000 a year, and that it will not be considered a "quali-
     fied personal service corporation" if operated as a C corpora-
     tion, so you may be able to benefit from income-splitting by us-
     ing |VAR| as a second taxpayer.

@RD\19
   . Unlike a sole proprietorship or partnership, a corporation
     has continuous existence and does not terminate upon the
     death of a stockholder or a change of ownership of some or
     all of its stock.  Creditors, suppliers, and customers often
     prefer to deal with an incorporated business because of this
     greater continuity of the enterprise that is provided by the
     corporate form.  Of course, like other forms of business or-
     ganization, a corporation can be terminated by mutual consent
     of the owners, or even by one shareholder in some instances.

   . A corporation also provides advantages, particularly when
     compared to a partnership, of centralized control, since
     state corporate laws typically provide rules for election of
     a board of directors by the shareholders and selection of a
     president and other corporate officers to manage the everyday
     affairs of the business, by the board of directors.  Lines of
     authority are usually much clearer and more formal than in
     the usual partnership arrangement.

@RD\20
   . The ability of participants to individually borrow against
     their accounts under a pension plan can be a significant benefit
     of having a pension plan for your employees.  However, borrowing
     is allowed only in the case of a "qualified" pension or profit
     sharing plan of a C corporation.  Such borrowing is subject to a
     "prohibited transactions" penalty tax in the case of a plan
     maintained by unincorporated business (Keogh plan) or by an S
     corporation.  You have indicated that the ability of partici-
     pants to borrow from your firm's pension or profit sharing plan
     is|VAR| important to your company.

@RD\21
   . The corporate "dividends-received deduction," under which a
     C corporation (but not an S corporation) can exclude 70% or
     more of dividends it receives from corporate stock invest-
     ments from taxable income, is a valuable potential tax benefit
     of operating a business in the form of a C corporation.  You
     have indicated that this may be an important tax benefit in
     your case.

@RD\22
   . The federal tax laws permit corporate employers (except for
     S corporations) to provide a number of different fringe
     benefits to employees who are owners (shareholder-employees),
     on a tax-favored basis.  Generally, the employer is allowed
     to deduct the insurance premiums or other payments it makes
     on behalf of the employee, while the employee is not taxed on
     the value of the benefit provided.  Thus, being incorporated
     (as a C corporation) has important advantages for your busi-
     ness if you wish to obtain group-term life insurance, health/
     accident coverage (insured or otherwise), or disability in-
     surance coverage for the principals in your business, since
     you will not be able to obtain this favorable tax treatment
     as an S corporation, or as a partner or sole proprietor in an
     unincorporated business, with regard to these kinds of fringe
     benefit plans.

@RD\23
   . Because your C corporation has substantial unused net opera-
     ting loss (NOL) or tax credit carryovers, liquidating the
     corporation would have a major disadvantage:  Those NOL or
     credit carryovers, which might otherwise be used to offset
     future taxable income of the corporation someday, would van-
     ish forever if your corporation were liquidated and turned
     into an unincorporated business.  Also, if S corporation
     status were elected, those carryovers would then become
     useless until after the corporation elected to revert back
     to C corporation status once again--they could not be used to
     shelter any income earned while operating as an S corporation.

@RD\24
   . You have indicated that your business is a professional ser-
     vice firm.  As a C corporation, you will incur a major dis-
     advantage, since all of the taxable income of a "qualified
     professional service corporation" is subject to a flat federal
     tax rate of 34%.  This is higher than the top individual tax
     bracket and a serious disincentive to operating a professional
     firm as a C corporation.

@RD\25
_______________________________________________________________________

         S CORPORATIONS VS. C CORPORATIONS:

         Advantages of C Corporations over S Corporations--

   . C corporations are generally less complex entities to main-
     tain, from a tax standpoint, than S corporations.

   . C corporations (except for certain "personal service corpor-
     ations"), can offset losses from passive activities against
     active business income.  S corporations cannot.

   . C corporations are entitled to the dividends received deduc-
     tion on any dividend income they receive; S corporations are
     not.

@RD\26
   . C corporations are separate tax-paying entities, so at certain
     levels of corporate net income, generally under $100,000, a C
     corporation may be used advantageously to split income, paying
     tax at rates lower than if the income were taxed to individual
     shareholders, as in the case of an S corporation.

@RD\27
   . Shareholder-employees of C corporations have advantages over S
     corporation shareholders (who own over 2% of the stock) with
     regard to excluding from income the cost of certain fringe
     benefits for owners, such as health care coverage, group-term
     life insurance, and long-term disability insurance.

@RD\28
   . Owner-employees may borrow from their qualified pension or
     profit sharing plans, if the plans are sponsored by a C
     corporation.

@RD\29

         Advantages of S Corporations over C Corporations--

   . S corporations do not usually have to be concerned about
     possible double taxation of corporate profits, since their
     profits are generally taxed only once, to the shareholders.

   . Also, S corporations are not subject to corporate penalty
     taxes, such as the personal holding company tax or the ac-
     cumulated earnings tax, which apply only to C corporations.

@RD\30
   . If a new corporation is incurring losses, shareholders of
     an S corporation may be able to utilize the tax losses cur-
     rently, while a C corporation can only carry the losses over
     till it eventually (if ever) becomes profitable.

@RD\31
   . Conversely, at high levels of taxable income (generally over
     $100,000),  S corporation shareholders may pay tax at a lower
     rate than a C corporation would pay on the income.

@HELP

@H\01

   Type in the name of your business,
   then press "Enter" key.

@H\02

Enter "Y" ("Yes")  if you are already in
business.   If you are still planning to
start or acquire the business, enter "N"
("No").

@H\03

Note that if you were to sell your stock
in an S corporation,  your tax basis for
the stock is likely to be something more
or less than your  original cost,  since
income  or contributions  to  capital of
the corporation will have increased your
tax basis,  and tax losses and distribu-
tions will have decreased your basis. So
you need to use your ADJUSTED  tax basis
for your stock,  not its original basis,
in "guesstimating" your gain  or loss on
stock of an S corporation.

@H\04

 Answer this question "Y" for "Yes" or
 "N" for "No."

@H\05

An "S corporation" is a corporation that
has made an election (on Form 2553)  for
Federal income tax purposes to have most
or all of its income & all of its losses
taxed directly to its shareholders,  in-
stead  of paying  tax  at the  corporate
level.   A corporation  that is NOT an S
corporation is called a "C corporation."

Corporations may also elect treatment as
S corporations for state income tax pur-
poses, in all but a few states.

@H\06

Answer "Y" ("YES") if you anticipate tax
losses by your corporation,  EVEN IF you
anticipate that such losses might not be
currently utilizable for some reason, by
a C corporation, or if passed through to
you by an S corporation.

@H\07
In computing your firm's estimated pre-
tax  profits for  the purposes  of this
question, make the hypothetical assump-
tion that  each owner  will take out no
more than $100,000 a year in salary.

Thus, for example,  if you actually in-
tend to take  out $150,000  salary next
year, add back  $50,000 to pre-tax cor-
porate income to do this calculation.

@H\10

Answer "N" ("NO") if you anticipate sub-
stantial losses, or credits but for some
reason, such as passive activity loss or
at-risk loss restrictions, or insuffici-
ent "tax basis," you do not expect to be
able to immediately use those losses (or
credits)  on your individual  income tax
return.

@H\11

In computing pre-tax profit for purposes
of answering this question,  do not sub-
tract draws or  salary taken  out of the
business by you (or by other owners).

@H\12

Medical, disability, and group-term life
insurance fringe benefits for the owners
of a C corporation are treated very fav-
orably for tax purposes.   Not  only  is
the amount paid for such insurance most-
ly nontaxable to the employee-owner, but
the benefits (insurance payments,  etc.)
are generally tax-free to the recipient,
as well, except for  disability benefits
(which are generally  taxable to the em-
ployee, if the premiums were paid by the
corporation).

@H\13

To be a QPSC, a corporation must be en-
gaged almost  exclusively in  rendering
services in  one of the fields  listed,
and must be "substantially" (95%) owned
by its employees, retired employees, or
the estate of either (or by an heir, up
to 2 years after death).

The definition of a Qualified  Personal
Service Corporation is very complex and
difficult to explain to  anyone but tax
lawyers. At this point, you may wish to
exit to the menu of consulting subjects
and go thru the Q & A routine on QPSCs.

@H\14

Note that a  Keogh plan, a Section 401K
plan, or an ESOP is a qualified plan.

However, an "SEP" ("Simplified Employee
Pension  plan"), in which  the employer
contributes  to IRA accounts set  up on
behalf of employees,  is NOT considered
a qualified  plan for purposes  of this
analysis.

@H\15

In general,  a participant in a pension
or profit sharing plan may borrow up to
$50,000 from the plan, but not over the
larger of the following two amounts:

   . One-half of his or her vested
     benefits under the plan; or

   . $10,000.

An owner-employee  is  prohibited  from
borrowing at all from an  S corporation
plan, or from a Keogh plan (of an unin-
corporated business).

@H\16

Some types of corporations, such as typ-
ical professional  corporations  in many
states, provide little, if any,  limita-
tion on liability since the laws in many
states provide that such corporations do
NOT limit liability  for claims  such as
professional malpractice damages,  which
are a  major area of  exposure for  most
types of professional corporations.

@H\17

"Adjusted Ordinary Gross Income"  is the
ordinary GROSS income (excluding capital
gains) of a corporation,  before any de-
ductions, except for certain adjustments
applicable to  rental income and mineral
and oil and gas royalty income (such  as
depreciation or depletion, property tax,
interest and rents paid), and other mis-
cellaneous  adjustments that  apply only
to  certain  kinds of  special taxpayers
and types of income.

@H\20

Note that if your C corporation borrows
money to finance or carry its purchases
of dividend-paying stocks,  in order to
benefit from the dividends received de-
duction, its interest deduction will be
reduced.  It cannot deduct interest in-
curred to buy tax-free investments.

@H\21

Note that losses passed through by an S
corporation to its shareholders are not
necessarily deductible by a shareholder
if the shareholder has  used up all the
"tax basis" of his stock (plus loans he
has made to the corporation).   Nor can
such losses be used if they are consid-
ered "passive activity" losses, and the
shareholder  does not  have income from
other  passive activities  that he  can
offset the passive losses against.

@H\22

Note that your  corporation may be very
profitable,  with  significant  taxable
income and  tax liability,  and yet may
still have significant tax credits that
it is carrying forward, due to the com-
plex interplay between  tax credits and
the alternative minimum tax ("AMT") un-
der the  tax law.   Liquidation  of the
corporation would cause any such carry-
overs,  as well as  any NOL carryovers,
to be lost forever.

@END