Assigning Schedule C Income to a corporation


A

Animal

I am in the securities business. Due to the fact that I
hold individual licenses, broker dealers will only pay
income to me as an individual under my social security
number. As a result, all of my income is funneled to a
schedule C and subject to SE tax. I have been told that I
can assign this income to a corporation, pay myself a
salary, and pass a portion out as a distribution of profit
(subject to fair compensation). Can anyone elaborate on
this as I have not been able to find any information on it
or how to do it. It would be greatly appreciated.
 
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S

Stuart A. Bronstein

Animal said:
I am in the securities business. Due to the fact that I
hold individual licenses, broker dealers will only pay
income to me as an individual under my social security
number. As a result, all of my income is funneled to a
schedule C and subject to SE tax. I have been told that I
can assign this income to a corporation, pay myself a
salary, and pass a portion out as a distribution of profit
(subject to fair compensation). Can anyone elaborate on
this as I have not been able to find any information on it
or how to do it. It would be greatly appreciated.
I don't know about this in the securities industry, but in
other businesses requiring licenses it is fairly simple to
get a corporation licensed based on your licenses. That
should solve the problem.

Stu
 
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H

Harlan Lunsford

Animal said:
I am in the securities business. Due to the fact that I
hold individual licenses, broker dealers will only pay
income to me as an individual under my social security
number. As a result, all of my income is funneled to a
schedule C and subject to SE tax. I have been told that I
can assign this income to a corporation, pay myself a
salary, and pass a portion out as a distribution of profit
(subject to fair compensation). Can anyone elaborate on
this as I have not been able to find any information on it
or how to do it. It would be greatly appreciated.
That's a sham and IRS would (or should) see right through it.

No, the commissions are directly service related (your
services) and there's no real business purpose for a
corporation.

ChEAr$,
Harlan Lunsford, EA n LA
 
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T

TxSrv

Animal said:
I have been told that I can assign this income
to a corporation, pay myself a salary, and pass a
portion out as a distribution of profit (subject
to fair compensation)
It is well-settled law that such an assignment cannot be
done. It wouldn't work anyway, and presuming you mean an S
Corp, because you can't take a lower salary than your
personal service income it receives. You must apply FICA to
100% of the money, less any expenses the 1120-S would have,
principally the employer's share of FICA. There's no
"profit" in receiving money and cutting a paycheck to one
person, in essence a sham. Else I'd be happy to take
anyone's paycheck or 1099 money, divide by like 2 and keep
1/2 for myself.

Fred F.
 
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H

Harlan Lunsford

TxSrv wrote:

(snipped)
100% of the money, less any expenses the 1120-S would have,
principally the employer's share of FICA. There's no
"profit" in receiving money and cutting a paycheck to one
person, in essence a sham. Else I'd be happy to take
"sham"! We use the same word.

GMTA

ChEAr$,
Harlan
 
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S

Stuart A. Bronstein

TxSrv said:
Animal wrote:
It is well-settled law that such an assignment cannot be
done.
Actually it's done all the time, and perfectly properly,
too. You just have to make sure you get to a good lawyer
and have the paperwork done up properly.

Stu
 
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A

Animal

Harlan said:
TxSrv wrote:
"sham"! We use the same word.
Thanks for your reply. Just so you know it is not my
intention to sham the IRS. I was told I could do this by
two different CPA's. I have also been told this by two
different associates who have their own CPA's that advised
this. I like to see some precedence before I move forward
of which I cannot find. I also assumed that I gave you all
the info, maybe I did and maybe I didn't. The income would
be assigned to my fee based advisory Corporation (S corp).
It still may not matter. I don't know. Taxes are not my
expertise.
 
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S

Seth Breidbart

I have been told that I can assign this income
It is well-settled law that such an assignment cannot be
done. It wouldn't work anyway, and presuming you mean an S
Corp, because you can't take a lower salary than your
personal service income it receives.
What if he can make a legitimate case that the "personal
service income" is larger than it might otherwise be because
of "goodwill" that has been built up?

Seth
 
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S

Stuart A. Bronstein

Animal said:
Harlan Lunsford wrote:
Thanks for your reply. Just so you know it is not my
intention to sham the IRS. I was told I could do this by
two different CPA's. I have also been told this by two
different associates who have their own CPA's that advised
this. I like to see some precedence before I move forward
of which I cannot find. I also assumed that I gave you all
the info, maybe I did and maybe I didn't. The income would
be assigned to my fee based advisory Corporation (S corp).
It still may not matter. I don't know. Taxes are not my
expertise.
Technically you don't want to assign income. What you want
to do is have the corporation be the contracting party, so
any money would be owed to it. Just like when you have an
IBM tech come out and work on your computer you make the
check out to the company, not to him.

That's the reason I suggested looking into how to get your
corporation licensed - it's common to do so in other
professions such as CPA's, lawyers, real estate brokers,
etc. The difference is that stock brokers are licensed by
the federal government instead of the states, so the
procedures may be different.

Once your corporation qualifies for a license, your
corporation enters into the contracts instead of you. You
are only an employee of the corporation.

Stu
 
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H

Harlan Lunsford

Actually it's done all the time, and perfectly properly,
too. You just have to make sure you get to a good lawyer
and have the paperwork done up properly.
No doubt it is "all the time", however, there must be a
valid business purpose for it and not just for tax purposes.
That's the difference, and in these cases IRS can reassign
income back to the rightful recipient.

ChEAr$,
Harlan Lunsford, EA n LA
 
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H

Harlan Lunsford

Thanks for your reply. Just so you know it is not my
intention to sham the IRS. I was told I could do this by
two different CPA's. I have also been told this by two
different associates who have their own CPA's that advised
this. I like to see some precedence before I move forward
of which I cannot find. I also assumed that I gave you all
the info, maybe I did and maybe I didn't. The income would
be assigned to my fee based advisory Corporation (S corp).
It still may not matter. I don't know. Taxes are not my
expertise.
These CPA's you speak of are assuming that it will be the
corporation after it is formed that will contract with your
employer. That's a horse of a different color.

ChEAr$,
Harlan Lunsford, EA n LA
 
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T

TxSrv

It is well-settled law that such an assignment cannot be
Actually it's done all the time, and perfectly properly,
too. You just have to make sure you get to a good lawyer
and have the paperwork done up properly.
I'm curious as to what a lawyer can do to avoid the "S Corp
compensation issue. So far as know, IRS has attacked it on
purely employment tax grounds. Any payment (S-Corp profit
distribution) which under the facts is disguised
compensation to theshareholder/officer. I think it's
frivolous argument that payments for the poster's personal
services aresubstantially diminihsed by passing them through
the S Corp bank account.

In one such cae, IRS won in Tacourt where there was a real
business. Two,m in related >
 
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T

TxSrv

Please excuse my previous post if Moderator didn't catch
incomplete, unedited text with flaky space bar and ignored. Hit
Send button instead of Save button. Actually a cheap, flaky
little wireless notebook with a hair-trigger mouse pad, but mere
shameless excuse. To repeat:
Actually it's done all the time, and perfectly properly,
too. You just have to make sure you get to a good lawyer
and have the paperwork done up properly.
I'm curious as to what a lawyer can do to avoid the "S Corp
compensation" issue. IRS has successfully attacked this on
purely employment tax grounds where reasonable salary need
not be the issue. Any payment (S-Corp profit distribution)
which under the facts is disguised compensation to the
shareholder/officer is subject to FICA. I think it's a
frivolous argument that payments for the poster's personal
services are substantially diminished by merely passing them
through the S Corp's bank account.

In one such case, IRS won in Tax Court where there was a
real business. Two unrelated, 50/50 S/H in a plumbing
business, presuming other workers and other profit-earning
capital (but not described in the facts). None of this thus
mattered, as only around $25K in reported FICA wages to each
apparently spoke for itself. Add'l, substantial S Corp
distributions were subjected to FICA.

Fred F.
 
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S

Seth Breidbart

Stuart A. Bronstein said:
That's the reason I suggested looking into how to get your
corporation licensed - it's common to do so in other
professions such as CPA's, lawyers, real estate brokers,
etc. The difference is that stock brokers are licensed by
the federal government instead of the states, so the
procedures may be different.
I suspect that the costs of getting a corporation licensed
in the securities industry is much higher than any potential
tax benefits. It might not even be feasible for too small a
company (e.g. a corporation requires supervisory personnel,
a compliance manager, etc.) There might be some loophole
for a single-person corp.; I've never looked into it.

Seth [ex-RR]
 
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H

Harlan Lunsford

It is well-settled law that such an assignment cannot be
I'm curious as to what a lawyer can do to avoid the "S Corp
compensation issue. So far as know, IRS has attacked it on
purely employment tax grounds. Any payment (S-Corp profit
distribution) which under the facts is disguised
compensation to theshareholder/officer. I think it's
frivolous argument that payments for the poster's personal
services aresubstantially diminihsed by passing them through
the S Corp bank account.

In one such cae, IRS won in Tacourt where there was a real
business. Two,m in related >
For a moment I was tempted to jump back in here and outline
some of the factors which would militate against all income
being personal service type and therefore all subject to SE
tax. For example an S corporation with long standing
goodwill factors such as location, long establishment,
prestige in community, and also maybe payments of rent to S
corp owner for the building, but..... Looks like the OP is
is a licensed securities dealer, and this is a "PERSON"al
attribute whereas a corporation may not be. Not really
familiar with licensing requirements. Only IF the
corporation could hold the license, then it might could
employ owner to do the work at a reasonable wage.

ChEAr$,
Harlan Lunsford, EA n LA
 
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A

Animal

Technically you don't want to assign income. What you want
to do is have the corporation be the contracting party, so
any money would be owed to it. Just like when you have an
IBM tech come out and work on your computer you make the
check out to the company, not to him.

That's the reason I suggested looking into how to get your
corporation licensed - it's common to do so in other
professions such as CPA's, lawyers, real estate brokers,
etc. The difference is that stock brokers are licensed by
the federal government instead of the states, so the
procedures may be different.

Once your corporation qualifies for a license, your
corporation enters into the contracts instead of you. You
are only an employee of the corporation.
Your comments have been appreciated and helpful. Securities
licences can not be issued to a corporation only to the
individual. this is where the problem comes in. I will
talk to some of the people I know are doing it and see if
they can elaborate further. Thanks again for your comments.
 
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S

Stuart A. Bronstein

I'm curious as to what a lawyer can do to avoid the "S Corp
We were talking about assignment of income (I assumed to a
C-corp), which is a related but different question. In the
S-corp situation, the issue is reasonable compensation. A
lawyer can't do much about that.
For a moment I was tempted to jump back in here and outline
some of the factors which would militate against all income
being personal service type and therefore all subject to SE
tax. For example an S corporation with long standing
goodwill factors such as location, long establishment,
prestige in community, and also maybe payments of rent to S
corp owner for the building, but..... Looks like the OP is
is a licensed securities dealer, and this is a "PERSON"al
attribute whereas a corporation may not be. Not really
familiar with licensing requirements. Only IF the
corporation could hold the license, then it might could
employ owner to do the work at a reasonable wage.
Exactly. I do know that corporations hold securities
licenses, but I don't know all the details either. But
having a corporation licensed and then the OP becomming its
employee is the only way for him to achieve his stated goal.

Stu
 
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S

Stuart A. Bronstein

I have been told that I can assign this income
What if he can make a legitimate case that the "personal
service income" is larger than it might otherwise be because
of "goodwill" that has been built up?
Doesn't matter. If he earns the money he gets taxed on it.

Now, if he can legally transfer his goodwill to a
corporation in a tax-free exchange for its stock, and the
corporation is the contracting party, then he might be able
to get away with it. Because in that case he's not assigning
income, the corporation is, technically, earning it. And he
just gets paid a salary.

Stu
 
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S

Stuart A. Bronstein

I suspect that the costs of getting a corporation licensed
in the securities industry is much higher than any potential
tax benefits. It might not even be feasible for too small a
company (e.g. a corporation requires supervisory personnel,
a compliance manager, etc.) There might be some loophole
for a single-person corp.; I've never looked into it.
My guess is that if the guy is already licensed, having a
corporation licensed (based on his) may be fairly routine
and inexpensive. That's the way it is for other professions,
at least those licensed by the State of California.

Stu
 
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I

Ira Smilovitz

No doubt it is "all the time", however, there must be a
valid business purpose for it and not just for tax purposes.
That's the difference, and in these cases IRS can reassign
income back to the rightful recipient.
Actually, I just ran across this setup with a real estate
agent. The CPA suggested an S-Corp operating under a d/b/a
of the individual's name since real estate commissions can
only be paid to "individuals". Interestingly enough, the
reason for setting up the S-Corp wasn't to avoid/reduce SE
taxation, but to minimize the likelihood of an audit.
According to the CPA, audit rates are much lower for S-Corps
than for 1040's containing Schedule C. It seems to me, that
the added costs of the S-Corp (additional tax returns and
state fees) may be a steep price to pay just to avoid an
audit. But then, I don't know how clean these financial
records are.

Ira Smilovitz
 
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