Tuesday, April 19, 2011

Was an S-Corp Election the Correct One for this Dental Start-Up?

I live in Massachusetts, but I am using a New York CPA for my taxes. I was happy with what he did for my taxes so far, but ever since I began the process of my start-up, I have started to lose some confidence in him. Even though I told him that my start-up was projected to open in 2011, he told me to set up my subchapter S-Corp right away. I didn't know anything at that time, so I just agreed and paid him $750 to set up my corporation.

I did not tell my bosses about my corporation because I didn't want them knowing about my start-up yet. Therefore, my paychecks still went to me, and not my company. So my corporate tax return for 2010 reported a $2471 loss, and $24221 total assets, from various costs, such as lease negotiation fees, lawyer fees, demographics reports, architect fees, some equipment, supplies, etc. After all the paperwork, he charged me $650 for the preparation fee, and I still had to pay a $456 minimum Massachusetts tax. I think that this $1106 extra cost could have been avoided if I did not set up my S-Corp until 2011, and I should have been informed of these costs at the beginning.

Was setting up my S-Corp in 2010 the right thing to do, or did my CPA rip me off for $650, and caused me to have to pay an unnecessary $456 in taxes? Was there an advantage to reporting the "soft assets" in 2010, compared to 2011?

I personally think I got ripped off, and have started to look around for a potential new CPA. What are the main advantages to having an in-state CPA versus an out of state CPA? I’m trying to decide between hiring a Massachusetts CPA, or going for a dental town CPA.

The advice to create the S-Corp now has absolutely nothing to do with what state the CPA lives in, in my opinion. It's a judgment call by the CPA plain and simple. An MA CPA may have made the same call.

That said, the question is, was creating any entity at that time the right choice? It probably was and I would have likely suggested it as well. However, I don't think I would have suggested S-Corp if MA accepts LLC's, which I believe it does.

If you plan on borrowing 100% or near 100% from a third party for your start-up make sure you talk to your CPA about S-Corp tax basis issues and how it affects the shareholders ability to deduct initial losses.

Thanks for the response Tim. I was wondering if it was more advantageous to hire an in-state CPA or an out of state CPA. I see posts about people asking for references for CPAs for their state on this forum all the time, so it makes me wonder why. Is it really that more advantageous for someone to hire a CPA that's based in their own state?

Primarily, you need to consider the expertise and skills of the CPA first and foremost, NOT what state they’re in, IMHO.

Secondarily, YOU have to consider what YOU'RE comfortable with. Some people prefer someone close by that they can walk or drive to for face-to-face meetings, I believe that's what drives the requests for "CPAs in my state". Others are comfortable with the long-distance professional relationship which has become more prevalent with the internet, webconferencing, skype, etc.

Even though we're based in MD, I believe our firm knows the surrounding state laws very well (that is, MD, DC, VA, PA) because we've always had clients in those areas.

I'll be the first to admit when we get a client out-of-state (other than the 4 I mentioned above) there's more work involved for us initially to get up to speed on the state and local specific tax laws like income, personal property & sales tax. However, because of the internet and our tax law library provider, all we really need to do is read up on it. The federal income tax laws apply to all states and many states follow the feds with respect to those taxes. So it's a question of learning about the entities they allow, how they tax them and the specific state laws on all the taxes.

Obviously the more clients you get in any one state helps you commit those state specific issues to memory.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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