Discussion Response
(421) Directions: Simply read the response below and provide a well thought out response on what you read using at least 100 words. Please make sure it is well thought out.
Bob will need to be aware of several things. When he was a sole proprietor, he filed on schedule C which flowed to the 1040 and was included in his taxable income. This amount included all of his profit, even what Bob left in the company. He must now file an IRS form 1120 (which must be filed on the 15th day of the 3rd month following the close of the tax year – so, March 15) and realize that taxation on his business is now quite different. Itemized deductions do not apply and therefore adjusted gross income is irrelevant. He will still receive a charitable giving deduction, but it will be limited more than the similar individual deduction.
However, he will now only have to pay personal taxes on the portion of profit he withdraws from the company instead of that which remains in the company. He might save taxes though because of this and because of the lower corporate tax rates. But he will now have to pay quarterly estimated taxes (usually in April, June, September, and December), and if he forgets this, he will have to pay penalties.
If he or his children decide to go public, they must also be aware that a corporation’s dividends are doubly taxed because they are part of the corporation’s taxable income (as they are paid from net profit) and the shareholder’s get taxed on the gains as well. Still, he might be able to get a little relief from the double taxation with the dividend received deduction.
A lot has changed, but Bob has protected his children to whom he will pass on the business, through his new limited liability, meaning the company is responsible for its debts instead of him or his children.
Solution Preview
I think the response is satisfactory and I totally agree with it. It is indeed true that taxation for Bob’s company is now very different from the past with the current situation whereby itemized deductions will no longer apply which in turn means that the adjusted gross income is not in handy.
(178 words)