Security Business

JUN 2018

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42 Security Dealer & Integrator / June 2018 Changing Your Business Designation Changing circumstances, revised tax laws and even the success of a secu- rity business may prompt a reas- sessment of the type of entity used. Although many of the tax law's pro- visions apply to all business entities, confusion need not be the name of Naturally, the decision to switch entities can be especially difficult for closely-held and family businesses that are oen structured as pass-throughs. Still, many experts say there is no lon- ger a reason to operate as an S corpo- ration or other pass-through entity. Other experts advise the owners of S corporations and other pass-through e annual tax return provides an opportunity to re-consider the options available. Entities with more than one shareholder or member can elect cor- porate status on its annual tax returns; thus, an entity that is a partnership under state laws may elect to be taxed as a C corporation or S corporation for federal taxes by using Form 8832 (Entity Classification Election). Unfortunately, under so-called "check-the-box" regulations, entities formed under a state's corporate laws are automatically classified corpora- tions and may not elect to be treated as any other type of entity. Pass-through owners considering moving to a corporate entity should be aware of the dreaded "accumu- lated earnings tax" – a 20-percent tax on businesses holding too much cash. e personal holding company tax, another 20-percent penalty on undis- tributed passive income earned by a closely-held, regular incorporated business is also a factor. ere is also the matter of how much of the security dealer or inte- grator's earnings will be distributed to shareholders. While corporations will pay a 21-percent tax rate, pass-through business owners could, as mentioned, pay as much as 29.6 percent, depend- ing on tax bracket and income type. Corporate distributions will also be taxed; thus, if a C corporation's profits are going to be distributed as divi- dends, the tax rate will likely be higher as a pass-through. Naturally, the dis- tribution policies can vary widely, especially among family businesses, requiring consideration of whether there are family members who are accustomed to getting distributions every year, or if there are trusts that have distribution requirements. ■ » Mark E. Battersby is a freelance writer who specializes in tax-related issues. Email him at The Money Issue TAXES Not only will the decision to change the business' entity have an impact on how much is paid in taxes, it will also affect the amount of paperwork required, the personal liability faced by the principals and the operation's ability to raise money. the game when choosing among the various entities – or choosing to be treated as a C corporation. Not only will the decision to change the business' entity by a security dealer or integrator owner have an impact on how much is paid in taxes, it will also affect the amount of paper- work required for the business, the personal liability faced by the prin- cipals and, especially important in today's economy, the operation's abil- ity to raise money. Since some areas of the law spe- cifically target each entity, choosing among the various entities can result in significant differences in federal income tax treatment. Of course, there is more to choosing the right struc- ture for a security business than taxes. Guidance is also needed when mak- ing many of the accounting method changes necessary in order to comply with the new law. businesses to remain patient – aer all, converting from a pass-through entity to a C corporation can be complicated and require quite a few adjustments. How to Make the Switch With so much potential profit at stake for pass-through businesses and their owners, the best approach might be for every security dealer/integrator owner to choose their business entity based on the new "reformed" tax law. To help with this decision, professional advice is strongly recommended. A security business can revoke its "subchapter S" election by March 15 to have it apply for the whole calendar year. If the decision that it is no longer advantageous to be an S corporation comes later, the election can be made and become effective from that point on. A business choosing to terminate their operation's S corporation status cannot reapply for five years.

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