August 2014

August 2014

Structuring the Business: S Corporation or LLC?

One of the common questions that we receive involves how to structure the business.  Traditionally, entity choice involved selecting from a sole proprietorship, partnership or corporation.  Beginning in the 1960s, however, the S corporation election became available to allow the pass-through of income and loss to the shareholders.  In the late 1970s the LLC concept emerged in Wyoming as a means of assisting the oil industry by giving their business enterprises partnership tax treatment but with the limited liability feature of a corporation.  When the IRS later blessed partnership tax treatment of an LLC, every other state passed legislation that allowed for the creation of LLCs.  In addition, an LLC can select its tax treatment and if no election is made, certain default rules apply. 

There are several things to consider when deciding to form either an S corporation or an LLC.   

The LLC as a Partnership

The default classification of a multi-member LLC for federal tax purposes is as a partnership, since the IRC does not recognize the LLC as a separate entity.  Taxation as a partnership provides the most flexibility of any entity.  On that point, consider the following:

  • Upon contribution of assets to a partnership, generally no gain or loss is recognized and the basis of the contributed assets, less any debt relief that may occur upon contribution, becomes the member’s basis in the member’s interest in the entity.
  • The allocation of income and losses is accomplished either through the operating agreement or by written or unwritten agreement of the members. However, the allocations must be in proportion to each partner’s interest in the LLC, or they must have “substantial economic effect."
  • A member is not an employee of the LLC.  Thus, any payments to a member are not subject to payroll taxes or withholding

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Health Reimbursement Plans Not Compliant with ACA Could Mean Exorbitant Penalties

As we settle into the second half of 2014, it is imperative that farmers, ranchers, and other small employers evaluate their health reimbursement plans to ensure that they comply with Affordable Care Act (ACA) requirements. As of January 1, 2014, a number of long-time options became illegal under the ACA. Lest employers are tempted to ignore this issue, they should know that offering noncompliant plans subjects them to a possible excise tax of $100 per day per employee per violation. ACA violations are no small matter.

ACA Market Reforms

Beginning January 1, 2014, the ACA implemented a number of “market reforms,” which dictate the types of coverage any valid group health plan must offer. Included in these reforms are the requirements that a group health plan impose “no annual dollar limits” on essential health benefits and that that the plan provide preventive health services (such as colonoscopies and mammograms) without any out-of-pocket costs.

Noncompliant Plans Face Big Penalties

What surprises many is that these requirements apply to not only traditional group health plans but also to employer health reimbursement plans. This is because under the Internal Revenue Code, employer reimbursement plans are considered to be “group health plans.” Consequently, if an employer reimburses its employees tax free for the cost of acquiring health insurance on the individual market, the employer has established a “group health plan” subject to ACA market reforms. Because such a plan imposes an annual dollar limit up to the cost of the individual market coverage purchased, it violates the “no annual dollar limits” requirement of the ACA. Similarly, because standalone employer payment plans do not provide preventive services without cost-sharing in all instances, they violate the preventive services requirements of the ACA.

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TaxPlace is Almost Here!

We are putting the finishing touches on TaxPlace, our new 24/7 online subscription service for tax professionals. We are pleased to announce that we plan to go live with TaxPlace this Fall!

In keeping with the helpful feedback we received from many of you, the site will feature unlimited replays of our seminars, detailed articles on timely tax topics, practical "how to" resources and contact information for tax professionals, an "ask a question" feature, and much more! We will be offering yearly subscriptions at a low introductory price. Keep an eye out for detailed subscription information coming soon!


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CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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