S CORPORATION
An S corporation has advantages of incorporation, with limited liability of shareholders and unlimited life for the entity. There are also characteristics of partnerships, since the S corporation serves as a pass-through entity for tax purposes. Thus, the double taxation of corporations is avoided (both at corporate and personal level). With an S corporation, the income is included on the returns of each shareholder and taxed only once at the shareholder level.
A corporation is eligible for subchapter S status if it meets the following statutory requirements:
- The corporation itself must be a domestic corporation with only a single class of outstanding common stock. The shares of common stock may carry different voting rights without violating this requirement.
- The corporation may not own a controlling (80 percent plus) interest in a subsidiary corporation.
- Only individuals, estates, and certain trusts may be shareholders of the corporation. Nonresident aliens may not be shareholders.
- The number of shareholders is limited to 35. A married couple is considered a single shareholder, even if both spouses own shares.
A corporation becomes an S corporation by the unanimous election of its shareholders. The election is permanent for the life of the corporation unless shareholders owning a majority of the stock agree to revoke the election. An S election can be lost through sheer carelessness; an election is immediately terminated upon the infraction of any of the eligibility requirements. For example, if an individual shareholder neglects to consult his tax adviser and sells some of his stock to a partnership, the subchapter S status of the corporation ends as of the day of sale.
As you might imagine, such inadvertent terminations can have disastrous tax consequences. Moreover, the shareholders of a corporation that has lost its S election generally cannot make a new election for five years. Because of the severity of the problem, the law provides a very generous relief measure. If immediate steps to remedy the situation (i.e., reacquisition of the stock from the offending partnership in our example), the IRS may be willing to overlook the incident and allow the original S election to remain in effect.
DISABILITY INSURANCE
The health disability benefits provided are (excellent/marginal) and (should/wouldn’t) provide for you and your family in the event of the long-term illness or disability.
Hospitalization, major medical and disability programs should enable you to carry on your basic goals for your family without drastic changes in lifestyle, should a disability or prolonged illness strike you. With an adequate disability insurance policy, insured individuals can at least minimize their financial loss in case they are no longer able to perform their regular job.
The usual waiting, or elimination period varies from 60 days to one year. Lengthening the elimination period from 30 days to 120 days or 6 months reduces the premium considerably. Because a short-term disability can be handled by employee benefits or a dip into savings, it may be worthwhile to lengthen the elimination period to reduce the premium.
n Purchase disability insurance policies if not offered through your respective employers. The benefits should cover 60% to 70% of current salary. The maximum waiting period before benefits begin should not exceed 26 weeks.
If disability insurance is available through your employers but premiums paid by you, proceeds from the policy are nontaxable. However, if the premiums are paid by your employer, benefits are fully taxable.
FLEXIBLE SPENDING ACCOUNT
The flexible spending account allows one to convert after-tax expenditures to before-tax expenditures, providing a tax benefit that is not available through any other plan. Funded through salary reductions, benefits under the plan are not subject to federal income taxes.
A Flexible Spending Account offers reimbursement for medical expenses that are medically necessary and not covered by medical insurance. This includes:
· Dental care
· Eye-glasses
· Hearing aids
· Medical deductibles and out-of-pocket expenses
An employee may contribute a set amount each month to the reimbursement account. However, expenses must be submitted for reimbursement to avoid having amounts contributed forfeited at the end of the plan year.
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