Comment by gavinhoward
2 years ago
> The difference is that with the S-Corp, the expenditure cost is clearly documented, while with the LLC you're pretending that the number is $0 and gambling on not getting audited.
So if the IRS audits me, they'll say that my work is worth something and therefore, I have to pay taxes on it?
Sounds awful.
But I and the accountants I talked to don't think that's the case.
Also, I'm not going to take R&D credits, nor claim deductions from salary, so why would they care?
And I did the math: yes, an S Corp is technically better. But at the revenue levels I plan on seeing, the difference isn't that much (a few thousand), and any revenue gets taxed right away, which is more convenient for me. I'll take that instead of complicating my taxes.
So if the IRS audits me, they'll say that my work is worth something and therefore, I have to pay taxes on it?
Well, no...since you're not claiming to be making any revenue from that work, it doesn't matter. Whether you deduct 100% or 20% of your salary from $0 business income you still have $0 of taxable business income (and as an individual you don't get NOL carryovers so that amount is lost to you forever).
In fact, in the event of an audit, you'd likely get a refund since the IRS would determine that you're incorrectly calculating your tax liability by failing to capitalize your R&D expenditure (i.e., your flow-through revenue which is entirely treated as self-employment income). But, because this error affects other years' returns, which means that a one-return audit can turn into a multi-return audit. It also means you get put on a very special list of taxpayers subject to increased scrutiny (meaning, significantly more likely to be audited again in a future year).
But at the revenue levels I plan on seeing, the difference isn't that much (a few thousand), and any revenue gets taxed right away, which is more convenient for me. I'll take that instead of complicating my taxes.
Yes, the LLC is much simpler when it's a disregarded (single-owner flow-through) entity. But it's more complicated once you add other members or any employees. And as you've pointed out, you're already paying more in taxes.
My issue isn't with you choosing to use the LLC form because it's simpler, my issue is with you claiming that it's better for tax purposes on a numerical basis when it is clearly not.
> My issue isn't with you choosing to use the LLC form because it's simpler, my issue is with you claiming that it's better for tax purposes on a numerical basis when it is clearly not.
The problem is, as this whole comment section shows, is that is it not clear.
Because it isn't, I decided to go with the simpler option because I don't plan on having employees.
No, the problem is that many comments here are simply making false claims about how the tax situations work using bad math.
There is no dispute amongst tax advisors about whether a single-owner S-Corp is better than a single-member LLC for tax purposes: the S-Corp is better. Hands down.
But the LLC is simpler because a one-person LLC doesn't exist for tax purposes, it's just an extension of its owner. The cost of this simplicity is significantly higher taxes once you make enough money for taxes to matter.
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