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New Mexico S Corporation |
- The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.
- Fractional ownership shares are easily accommodated in the initial offering of stock.
- The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.
- The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.
- With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through direct to the stockholders.
- To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.
- The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a family group) and can provide more comprehensive guidance for management.
- Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.
- Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.
Disadvantages of the S Corporation:
- Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.
- Conflicts or disagreements among the stockholders may immobilize decision making.
- Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.
- Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.
- Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.
- Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.
- If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.
New Mexico’s Business Tax Climate Ranks 40th
New Mexico ranks 40th in the State Business Tax Climate Index, which measures the impact on business of five major elements of the tax system: the percentage of income taken by all taxes, the individual income tax rates, the corporate income taxes, the sales tax rate, and the complexity of the tax system. Neighboring states ranked as follows: Utah (26th), Arizona (19th), Texas (4th), Oklahoma (14th) and Colorado (8th).New Mexico’s State/Local Tax Burden Under National Average
In the early nineties, New Mexico’s tax burden was substantially above the national average. Since peaking at 11.6% in 1993, however, the state has seen its figure fall significantly. Individual incomes in the state have risen faster than state/local tax collections. Estimated in 2004 at 9.7% of income, New Mexico’s state/local tax burden percentage is ranked 29th nationally and just under the national average of 10.0%.
New Mexico’s Individual Income Tax System
New Mexico’s personal income tax system consists of seven brackets and a top rate of 8.2% kicking in at an income level of $65,000. New Mexico’s top rate of 8.2% is 7th highest among states levying personal income taxes. New Mexico's 2002 individual income tax collections were $531 per person (35th highest nationally).
New Mexico’s Corporate Income Tax Rate and Collections among the Nation’s Highest
New Mexico’s corporate tax structure consists of three brackets in which all income under $500,000 is taxed at 4.8%, income between $500,000 and $1 million is taxed at 6.4% and all income over $1 million is taxed at 7.6%. This upper tax rate ranks the New Mexico 20th highest among states levying corporate income taxes. In 2001, corporate tax collections reached $104 per capita ($159,338,000 total), good for 18th highest nationally.