Business Start-Ups magazine, November 1998
Q: I own a subchapter-S employment agency. I plan to start a small animal shelter. What are the advantages of making it part of my company? I am concerned about tax-deductible sales and nonprofit donations.
A: Provided by Carol W. Thompson, EA, a nationally known author and seminar instructor in the tax field.
Adding dogs to your agency could have the IRS barking up a storm over mixing for-profit and nonprofit companies.
A partnership, for two or more owners, reports income or loss to each partner on a Form K-1 that goes to Schedule E of the 1040. A C corporation (C-corp) has unlimited owners and pays its own taxes; its working owner receives a salary.
A subchapter-S corporation (Sub-S) is a hybrid of a partnership and a corporation, with limitations on the number of shareholders. The owners are on payroll; at year-end, net income or loss is reported on their personal returns via a K-1.
Your concern is raising money to run the shelter. Only donations to a 501(c)(3) or nonprofit corporation are deductible to the donor. Each year a nonprofit has income exceeding $25,000, it must file a special tax return with the IRS (and most states) to maintain nonprofit status.
Your Sub-S corporation is for-profit and has tax liability. If you mix your books, it will be difficult to keep expenses separate.
For information on becoming a nonprofit, call an enrolled agent (EA), a tax specialist licensed to represent taxpayers before the IRS. Look in the Yellow Pages under "Tax Preparation," call (800) 424-4339 or visit the National Association of Enrolled Agents at http://www.naea.org
Carol W. Thompson, (831) 373-0553