January 2021 Q & A

Q: Josh is starting a new landscape business. He’s heard bits of information about various business structures, including sole proprietor, LLC and an S-Corp. Which of these forms of business would offer him the most tax advantages?

A: Regardless of whether Josh legally forms his business as a sole proprietor or a single member LLC, he can choose to be taxed as an S-Corp which would enable Josh’s business to take certain tax breaks not available to sole proprietors. Josh will be an employee of the the S Corp. and he’ll avoid paying self-employment tax by paying himself a reasonable salary. If he does that, he’ll be able to take distributions of the company’s profits tax-free since the IRS considers this a distribution of equity. Many factors, including industry and size of the company, will determine what is considered to be a reasonable salary.

Q: We sold our home last year. Will we have to pay taxes on the sale?

A: If the home you sold is your primary residence and you lived in it for two of the last five years, up to $500,000 of the gain is excluded from your federal income tax, if your tax filing status is married filing jointly. But if you sold a primary residence within the last two years, you can’t claim another exclusion for two years. There are some exceptions for events such as divorce or death of a spouse. Consult your tax professional if your situation is not straightforward.