Dentists that are sole owners should usually select S Corporations

The number one reason that I like S corporation as the best choice for a dental practice owned by one shareholder is that the payment of payroll taxes can be reduced.  Although the IRS has been closely scrutinizing the amount of payroll S corporations should pay, I have found that when payroll is higher than the distributions, the IRS has not asked for additional payroll taxes like FICA and Medicare.

The number 2 reason that S corporations are the best form of structure is that S corporations are audited less than C corporations, sole proprietorships and partnerships.

The number 3 reason that S corporations are the best form of structure is that federal and state withholding can be paid out of bonuses paid in the 4th quarter of the year reducing underpayment of estimated taxes.

Although I recommend S corporations in most cases, I find that a few dentists cause themselves a lot of stress by failing to withhold enough federal and state withholding during the year.

If a dental practice had a C Corporation with a net operating loss, it would be unwise to convert to the S corporation because the losses would not be able to be used.

Becoming an S corporation is not difficult but I have seen over the years serious mistakes.

One mistake was that a dentist who wanted his practice to be taxed as an S corporation established a corporation himself but failed to make sure a Form 2553 S corporation election was completed. Therefore the dentist was stuck with a C Corporation!

Unfortunately I found out about the mistake after it was too late.  The practice did quite well and the C Corporation federal and state tax was over $85,000.  The lesson is that the dentist should have engaged a CPA firm that would have taken care of the election to become an S Corporation for under $100!

In this article, I am not going into all the rules of eligibility for an S Corporation but anyone considering an S corporation should know these rules.

If you live in a community property state, your spouse by reason of community property law may be an owner of your corporation. This can be true whether or not your spouse has stock in his or her own name.

If your spouse does not consent to the S corporation election on Form 2553, your S corporation is not valid.

There are two ways to become an S corporation. One way is to form a corporation and then elect form 2553. The other way is to create an LLC and then, by following the two steps here, make that LLC an S corporation.

If you want to convert your LLC to an S corporation for tax purposes, you need:

1. File IRS Form 8832 to check the box that converts your LLC to a C corporation.
2. Then file Form 2553 to convert your C Corporation into an S corporation.

If you have any questions, please call me at 602-292-2009

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

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Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com