While a bankruptcy filing at the flow-through entity level may stop or delay a foreclosure, tax benefits will mainly be gained where the bankruptcy filing is at the individual owner/member level.
This led to the Department of Finance's announcement on October 31, 2006 (referred to by some as the "Halloween Massacre") of the specified flow-through entity legislation (the "SIFT Legislation") which imposes an entity-level tax on publicly-traded income trusts at a rate comparable to corporate tax rates and taxes investors on income trust distributions in a manner similar to shareholders of a Canadian corporation.
Assuming that the group is a cash basis taxpayer and has not recognized any income with respect to its accounts receivable, a dividend distribution of cash in excess of the physician shareholder's income tax basis in his equity interest in the group from a flow-through entity will result in a capital gain to the physician shareholder.
6) Figure 1 Regular Corporation Year 1: $50,000 @ 15% + $25,000 @ 25% = $13,750 Year 2: the same $13,750 Year 3: the same $13,750 Total corporate tax for 3 years $41,250 Limited Liability Company - Each member with $40,000 in other taxable income Year 1: $75,000 split 2 ways = $37,500 each Total income per member: $40,000 + $37,500 = $77,500 Tax: $38,000 @ 15% + $39,500 @ 28% = $16,760 Less: tax on original $40,000 = $ 6,260 $10,500 times 2 members x 2 $21,000 Year 2: the same $21,000 Year 3: the same $21,000 Total tax if LLC for 3 years $63,000 Total corporate tax for 3 years $41,250 Total 3-year LLC disadvantage $21,750 However, if in the same example A and B had no other income, their tax savings by use of a flow-through entity would be $7,500.
Exhibit 2 Factors in Determining Reasonable Compensation C corporations S corporations Compensation paid in proportion Services performed in relation to stock ownership to salary Dividend history Number of employees Corporation's capital structure Degree of control over corporation Year-end increases in salary Undocumented loans receivable Existence of employment Existence of employment agreement agreement Statistical reasonableness Compensation level of other of compensation based on employees the company's sales Industry guidelines Industry guidelines Loan covenants Loan covenants ALLOCATION OF PROFITS AND LOSSES Another decision is whether to create a flow-through entity such as an S corporation or LLC.
financial institution, a qualified intermediary, a withholding foreign partnership or a withholding foreign trust, if the beneficial owner is a direct account holder or a direct beneficiary or owner, as applicable; or * Amounts received by other taxpayers (that are not individuals or governments) that have been properly reported on Form 1042-S and do not exceed $500,000 (increased from $10,000) and are not received through an intermediary or flow-through entity.
