corporation - Linkenheimer LLP CPAs & Advisors

Businesses Considering Incorporation Should Beware of the Reasonable Compensation Conundrum

Small to midsize businesses have valid reasons for incorporating, not the least of which is putting that cool “Inc.” at the end of their names. Other reasons include separating owners’ personal assets from their business liabilities and offering stock options as an employee incentive.

If you’re considering incorporation for your company, however, it’s essential to be aware of the associated risks. One of them is the reasonable compensation conundrum.

How much is too much?

Let’s say you decide to convert your business to a C corporation. After completing the incorporation process, you can pay owners, executives and other highly compensated employees some combination of compensation and dividends.

More than likely, you’ll want to pay your highly compensated employees more in compensation and less in dividends because compensation is tax deductible and dividends aren’t. But be careful — the IRS may be watching. If it believes you’re excessively compensating a highly compensated employee for tax avoidance purposes, it may challenge your compensation approach.

Such challenges typically begin with an audit and may result in the IRS being allowed to reclassify compensation as dividends — with penalties and interest potentially tacked on. What’s worse, if the tax agency succeeds with […]

By Linkenheimer LLP|2025-04-11T18:57:28+00:00April 11th, 2025|business, corporation|0 Comments

Nationwide Injunction Halts Beneficial Ownership Information Reporting Requirements

A federal district court in Texas has issued a nationwide preliminary injunction blocking the enforcement of the beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA). This decision, made in the case Texas Top Cop Shop v. Garland (December 3, 2024, U.S. Dist. Ct., Eastern District of Texas, Case No. 4:24-CV-478), has significant implications for businesses across the United States.

Background on the Corporate Transparency Act

The CTA, enacted to combat money laundering and enhance financial transparency, requires most U.S. corporations, limited liability companies (LLCs), and similar entities to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Initially, this reporting requirement was due by January 1, 2025, with penalties for non-compliance.

Court Ruling

The court ruled that Congress exceeded its constitutional authority by enacting the CTA, stating that it infringed upon states’ rights to regulate business entities. As a result, the court issued a nationwide injunction prohibiting FinCEN from enforcing the reporting deadline.

The court’s opinion emphasized that the CTA overstepped federal authority, making it an unconstitutional directive. This ruling effectively halts the implementation of BOI reporting requirements until further notice.

Implications for Businesses

For now, businesses are not required to file […]

By Linkenheimer LLP|2024-12-06T16:53:49+00:00December 6th, 2024|business, corporation, New Tax Laws, News|0 Comments

The Tax Advantages of Including Debt in a C Corporation Capital Structure

Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:

Some third-party debt (owed to outside lenders), and/or
Some owner debt.

Tax rate considerations

Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest.

On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations.

Third-party debt

The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money.

Even when shareholders can afford to cover […]

By Linkenheimer LLP|2024-05-20T17:20:08+00:00May 20th, 2024|corporation, debt|0 Comments