Monday, May 26, 2008
Wednesday, May 21, 2008
Tax Breakdown Finale
The third installment is going straight to CliffsNotes. If we assume the same things but reinvest all of the pub's income, this is what I think will happen:
-If we're taxed as a default LLC, Jane and I will each take home $22,725.62 and each of our investors will take home -$250.
-If we're taxed as an S-Corporation, Jane and I will each take home $23,395 and each of our investors will take home -$250.
-If we're taxed as a C-Corporation, Jane and I will each take home $24,645 and each of our investors will take home $0. However, the pub will lose $3,000 of its reinvestment to corporate income tax (we'll keep $17,000 instead of $20,000).
This is how I expect the first couple of years to look as we build up a cash reserve to prepare for unplanned expenses. We need to research other implications of choosing C-corporation taxation for an LLC, such as how oppressive the paperwork will be. We'll keep you posted; hopefully without all the boring math!
-If we're taxed as a default LLC, Jane and I will each take home $22,725.62 and each of our investors will take home -$250.
-If we're taxed as an S-Corporation, Jane and I will each take home $23,395 and each of our investors will take home -$250.
-If we're taxed as a C-Corporation, Jane and I will each take home $24,645 and each of our investors will take home $0. However, the pub will lose $3,000 of its reinvestment to corporate income tax (we'll keep $17,000 instead of $20,000).
This is how I expect the first couple of years to look as we build up a cash reserve to prepare for unplanned expenses. We need to research other implications of choosing C-corporation taxation for an LLC, such as how oppressive the paperwork will be. We'll keep you posted; hopefully without all the boring math!
Tuesday, May 20, 2008
Tax Breakdown, The Sequel
Boy was I wrong:
-LLC investors who aren't involved in company management don't need to pay self-employment taxes.
-Like LLCs, S-corporations don't pay income taxes. In fact, the two entities are treated almost equally for tax purposes. The only tax benefit of an S-corporation is that managing owners don't pay self-employment tax on their ownership shares of income.
-Taxation as a C-corporation is the only way for investors to avoid paying taxes on reinvested income.
The redo is below. I could still be wrong, but I'll be less wrong than before.
Jane and I each own 25% of the company and pay ourselves $40,000/yr salaries. The company makes a $20,000 profit and keeps $4,000 of it. We have 10 additional investors who each own 5% of the business. Assume that all owners are in the 25% income tax bracket and that the corporate tax rate is 15%.
Default LLC taxation:
-The company doesn't pay income tax.
-Before taxes, my income is $45,000 and my take-home pay is $44,000. I owe $6,885 in self-employment (SE) tax on my income and am allowed to deduct half of it on my income tax form, so I report an income of $41,557.50. I pay $10,389.38 in income taxes and take home $26,725.62.
-Before taxes, each non-managing investor reports $1,000 as income and takes home $800. After paying $250 in income taxes, each investor takes home $550.
S-corporation taxation:
-The company doesn't pay income tax.
-Before taxes, my income is $45,000 and my take-home pay is $44,000. I owe $6,120 in self-employment (SE) tax on my salary and am allowed to deduct half of it on my income tax form, so I report an income of $41,940. I pay $10,485 in income taxes and take home $27,395.
-Before taxes, each non-managing investor reports $1,000 as income and takes home $800. After paying $250 in income taxes, each investor takes home $550.
C-corporation taxation:
-The company reports $20,000 in income and pays $3000 in income tax. The company still reinvests $4,000, so $13,000 is distributed to investors instead of $16,000.
-Before taxes, my income and take-home pay are both $43,250. I owe $6,120 in self-employment (SE) tax on my salary and am allowed to deduct half of it on my income tax form, so I report an income of $40,190. I pay $10,047.50 in income taxes and take home $27,082.50.
-Before taxes, each non-managing investor both reports and takes home $650. After paying $162.50 in income taxes, each investor takes home $487.50.
Up next: what would happen if we reinvested all of our earnings?
-LLC investors who aren't involved in company management don't need to pay self-employment taxes.
-Like LLCs, S-corporations don't pay income taxes. In fact, the two entities are treated almost equally for tax purposes. The only tax benefit of an S-corporation is that managing owners don't pay self-employment tax on their ownership shares of income.
-Taxation as a C-corporation is the only way for investors to avoid paying taxes on reinvested income.
The redo is below. I could still be wrong, but I'll be less wrong than before.
Jane and I each own 25% of the company and pay ourselves $40,000/yr salaries. The company makes a $20,000 profit and keeps $4,000 of it. We have 10 additional investors who each own 5% of the business. Assume that all owners are in the 25% income tax bracket and that the corporate tax rate is 15%.
Default LLC taxation:
-The company doesn't pay income tax.
-Before taxes, my income is $45,000 and my take-home pay is $44,000. I owe $6,885 in self-employment (SE) tax on my income and am allowed to deduct half of it on my income tax form, so I report an income of $41,557.50. I pay $10,389.38 in income taxes and take home $26,725.62.
-Before taxes, each non-managing investor reports $1,000 as income and takes home $800. After paying $250 in income taxes, each investor takes home $550.
S-corporation taxation:
-The company doesn't pay income tax.
-Before taxes, my income is $45,000 and my take-home pay is $44,000. I owe $6,120 in self-employment (SE) tax on my salary and am allowed to deduct half of it on my income tax form, so I report an income of $41,940. I pay $10,485 in income taxes and take home $27,395.
-Before taxes, each non-managing investor reports $1,000 as income and takes home $800. After paying $250 in income taxes, each investor takes home $550.
C-corporation taxation:
-The company reports $20,000 in income and pays $3000 in income tax. The company still reinvests $4,000, so $13,000 is distributed to investors instead of $16,000.
-Before taxes, my income and take-home pay are both $43,250. I owe $6,120 in self-employment (SE) tax on my salary and am allowed to deduct half of it on my income tax form, so I report an income of $40,190. I pay $10,047.50 in income taxes and take home $27,082.50.
-Before taxes, each non-managing investor both reports and takes home $650. After paying $162.50 in income taxes, each investor takes home $487.50.
Up next: what would happen if we reinvested all of our earnings?
Monday, May 19, 2008
The beautiful liquid pictured below is a mixture of Ketel One vodka, toasted French oak chips and three days of time.
Being able to taste the woody vodka will be a nice side benefit of what I'm really up to: teaching myself how to brew sour beers.
My favorite sour beers are Flanders red ales and their derivatives, which are traditionally aged in oak barrels for 1-3 years. The oak isn't used to provide flavor, though. Its real purpose is to provide a home for souring microorganisms, aka wild yeasts and bacteria. For that reason, commercial brewers typically revive old wine barrels that don't have a lot of flavor left in them. I'm trying to strip the flavor from my wood chips by soaking them in vodka.
Why use chips instead of a barrel? The huge barrels common to commercial producers have small surface to volume ratios, which reduce the diffusion of oxygen into the beer. Too much oxygen would result in pure vinegar. Wood chips in a glass fermenter will restrict oxygen better than a small barrel, and the beer should more closely resemble what would be produced in a large barrel. I plan on using spent wine barrels to age sour beers at the pub, though. Wollersheim, are you reading this?
Being able to taste the woody vodka will be a nice side benefit of what I'm really up to: teaching myself how to brew sour beers.
My favorite sour beers are Flanders red ales and their derivatives, which are traditionally aged in oak barrels for 1-3 years. The oak isn't used to provide flavor, though. Its real purpose is to provide a home for souring microorganisms, aka wild yeasts and bacteria. For that reason, commercial brewers typically revive old wine barrels that don't have a lot of flavor left in them. I'm trying to strip the flavor from my wood chips by soaking them in vodka.
Why use chips instead of a barrel? The huge barrels common to commercial producers have small surface to volume ratios, which reduce the diffusion of oxygen into the beer. Too much oxygen would result in pure vinegar. Wood chips in a glass fermenter will restrict oxygen better than a small barrel, and the beer should more closely resemble what would be produced in a large barrel. I plan on using spent wine barrels to age sour beers at the pub, though. Wollersheim, are you reading this?
Friday, May 16, 2008
Wednesday, May 14, 2008
Income Tax
Boo to that!
Jane and I met with a lawyer yesterday, and we verified that a Limited Liability Company (LLC) is going to be the best way to structure our business. Before we apply for a Federal Employee ID Number, we'll have to decide if we want our company taxed as a corporation or a partnership for income purposes. Being taxed as an S-corporation would be more attractive than a C-corporation, and I believe we can elect to be taxed as either. I might not be right, but here's my interpretation of the situation:
Suppose that Jane and I each own 25% of the company and pay ourselves $40,000/yr salaries. After paying ourselves, assume that our 2009 profits will be $20,000 and that we'll put $4,000 of it in our company reserve. If we have 10 investors who all contribute the same amount of startup capital, each of them would own 5% of the business and receive $800 of the remaining $16,000. Finally, assume that 2006 tax rates are in effect.
If taxed as a C-corporation:
-The total $20,000 income will be taxed at the corporate rate of 15%, which means that the government would take $3,000. As a result, our investors would have $13,000 to divide between them instead of $16,000.
-Jane and I would each pay a 15.3% self-employment tax on our salaries, and then pay personal income taxes on what's left.
-Each investor would pay personal income taxes for their $650 dividend. If an investor is taxed at 25%, their take-home pay would be $487.50.
-Jane and I would also owe personal income taxes on our dividends.
If taxed as an S-corporation:
-Only the $4,000 in retained earnings would be taxed at the corporate level, which would result in the company owing $600 in income taxes.
-Jane and I would each pay a 15.3% self-employment tax on our salaries, and then pay personal income taxes on what's left.
-Each investor would pay personal income taxes for their $800 dividend. If an investor is taxed at 25%, their take-home pay would be $600.
-Jane and I would also owe personal income taxes on our dividends.
If taxed as a partnership (the LLC default):
-The company doesn't pay income tax.
-Jane and I would each pay a 15.3% self-employment tax on our salaries, and then pay personal income taxes on what's left.
-Taxes on investor income are based on percentages of company income, not paid dividends. This means that earnings retained by the company are still considered investor income, and each investor would "make" $1,000 even though they would only be paid $800.
-Each investor would pay a 15.3% self-employment tax on their $1,000 income, which would be $153. Each investor would then pay personal income taxes for their remaining income of $847. If an investor is taxed at 25%, their take-home pay would be $435.25.
-Jane and I would also owe personal income taxes on our share of company income.
Under a partnership tax structure, it would be possible for the company to reinvest enough money that investors would owe more in taxes than they would earn in dividends. Ugh! I know that incorporating the business as an S-corporation would result in more paperwork than would be worthwhile, but I'm not sure about having an LLC that's taxed like an S-corporation. Jane is gonna talk with someone tonight who knows a thing or two about taxes.
Jane and I met with a lawyer yesterday, and we verified that a Limited Liability Company (LLC) is going to be the best way to structure our business. Before we apply for a Federal Employee ID Number, we'll have to decide if we want our company taxed as a corporation or a partnership for income purposes. Being taxed as an S-corporation would be more attractive than a C-corporation, and I believe we can elect to be taxed as either. I might not be right, but here's my interpretation of the situation:
Suppose that Jane and I each own 25% of the company and pay ourselves $40,000/yr salaries. After paying ourselves, assume that our 2009 profits will be $20,000 and that we'll put $4,000 of it in our company reserve. If we have 10 investors who all contribute the same amount of startup capital, each of them would own 5% of the business and receive $800 of the remaining $16,000. Finally, assume that 2006 tax rates are in effect.
If taxed as a C-corporation:
-The total $20,000 income will be taxed at the corporate rate of 15%, which means that the government would take $3,000. As a result, our investors would have $13,000 to divide between them instead of $16,000.
-Jane and I would each pay a 15.3% self-employment tax on our salaries, and then pay personal income taxes on what's left.
-Each investor would pay personal income taxes for their $650 dividend. If an investor is taxed at 25%, their take-home pay would be $487.50.
-Jane and I would also owe personal income taxes on our dividends.
If taxed as an S-corporation:
-Only the $4,000 in retained earnings would be taxed at the corporate level, which would result in the company owing $600 in income taxes.
-Jane and I would each pay a 15.3% self-employment tax on our salaries, and then pay personal income taxes on what's left.
-Each investor would pay personal income taxes for their $800 dividend. If an investor is taxed at 25%, their take-home pay would be $600.
-Jane and I would also owe personal income taxes on our dividends.
If taxed as a partnership (the LLC default):
-The company doesn't pay income tax.
-Jane and I would each pay a 15.3% self-employment tax on our salaries, and then pay personal income taxes on what's left.
-Taxes on investor income are based on percentages of company income, not paid dividends. This means that earnings retained by the company are still considered investor income, and each investor would "make" $1,000 even though they would only be paid $800.
-Each investor would pay a 15.3% self-employment tax on their $1,000 income, which would be $153. Each investor would then pay personal income taxes for their remaining income of $847. If an investor is taxed at 25%, their take-home pay would be $435.25.
-Jane and I would also owe personal income taxes on our share of company income.
Under a partnership tax structure, it would be possible for the company to reinvest enough money that investors would owe more in taxes than they would earn in dividends. Ugh! I know that incorporating the business as an S-corporation would result in more paperwork than would be worthwhile, but I'm not sure about having an LLC that's taxed like an S-corporation. Jane is gonna talk with someone tonight who knows a thing or two about taxes.
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