"Renting" Web Space - Capital Gain or Ordinary Gain?

Glad you got it sorted out...

In my mind, a capital gain comes when you sell an investment for more than you paid for it.

Dividends are income - passive income because you only have to own an asset to collect.

Rent, whether in an office building or a web server, is ordinary income.

Given the sheer size of the tax code, though, that's probably way too simple...

John

I hope I didn't offend you. I guess I should clarify my statement. Most accountants that I have dealt with in regards to small businesses are record keepers. By that I mean they will record the information you provide in the correct places and make sure all the reports are complete and up to date. They do this after the fact though. So they keep a record of what is happening in the business. That is a vital part of knowing where you business is and where it is going.

For most small business owners, they need more. They need a partner who can help educate them on different ways of doing things and how they could save themselves money. They need a part time CFO but usually can't afford it.

In large companies they can divide this task and people can specialize. A small business owner needs someone who can help them

1) Understand cash flow and how they can impact it. They feel the effects of it but many times may be caught off guard by it.
2) Systems for proper record keeping (this is an area that most accountants I know do an excellent job of)
3) Understand how different business structures can impact their taxes and profitability
4) Understand different benefit deductions that go along with the structure

In my experience many business owners think - If there was another way to do it, my accountant would have already suggested it.

In most cases, that doesn't happen. When you go to select an accountant, tax preparer, etc., go in with your eyes open, understand what you are getting from them and explain to them what you want/need.

The thought process behind making sure all the information gets in the right place and interpreting that information to make decisions is very different.

Hey Tim Not an accountant or tax lawyer but do spend a lot of time doing taxes and doing tax research for clients. Wage Compensation for S Corporation Officers covers a lot on S-Corps. I copied the part that is probably relevant. "The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. This fact sheet clarifies information that small business taxpayers should understand regarding the tax law for corporate officers who perform services. Who's an employee of the corporation? Generally, an officer of a corporation is an employee of the corporation. The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages. Courts have consistently held that S corporation officer/shareholders who provide more than minor services to their corporation and receive or are entitled to receive payment are employees whose compensation is subject to federal employment taxes. The Treasury Regulations provide an exception for an officer of a corporation who does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration. Such an officer would not be considered an employee." I was specifically thinking of people who form single owner S-Corps to avoid SE taxes. It is possible to be a shareholder of an S-Corp receiving flow through income without being required to pay themselves. It just isn't likely. I would consult with a good accountant if you have an S-Corp so you don't get into trouble. It is worth the time to do it correctly. Well I tried twice to fix the spacing and it won't save. Sorry this is hard to read.

Its late so re-read your post. Notice I said don't pass ALL your income through without paying SE taxes. Someone work's for the company. You can have distributions that go to other shareholders that don't fit this criteria. Sorry for not catching that the first time. My eyes are getting older every day. PS S-Corps and LLC's have distributions not dividends. C-Corps issue dividends. S-Corps and LLCs have K-1s that go to their share holders that determine how their taxes will be paid. The tax rate is dependent on how the earnings were created but primarily will be taxed at normal income tax rates.

You are both right :-). You pay normal income tax rates on your share of the S Corp's income whether or not you receive any "distributions." This is how partnerships work as well. Your distributions are "tax free" to the extent that they don't exceed your stock basis. If your distributions exceed your stock basis, then the portion of the distribution that exceeds the stock basis is taxed at capital gain rates (only long-term if you have owned the S corp stock more than one year).

But if you are the sole owner of the S Corp, you can't receive distributions that exceed the stock basis because you own 100% of the stock. Therefore your distributions are simply a "tax free" return of capital because you already paid taxes on it.

Source: S Corporation Stock and Debt Basis

Brandon - I love this tax stuff!!!!