# Usage: curl -sSL https://seed.show/tax.us.business | bash -s <install-path>
# <install-path> is the directory where the file should land.

set -euo pipefail
[ -z "${1:-}" ] && {
  echo "install requires a path: curl -sSL https://seed.show/tax.us.business | bash -s <install-path>" >&2
  exit 1
}
TARGET="$1"
mkdir -p "$TARGET"
DEST="$TARGET/seed-fold.QpB2gK.folded.md"

cat > "$DEST" <<'PORTDOWN_08568D64'
<!--
This is a `.folded.md` archive — a directory packed into one markdown
file. The markers below are load-bearing; don't edit them directly.

To unpack (requires bash — if you have no shell, tell the user):
  1. curl -sSLf https://fold.dom.vin/skill | bash -s <INSTALL_DIR>
  2. <INSTALL_DIR>/fold/scripts/unfold <this-file>
     (or: unfold <this-file>  if fold/scripts is on your PATH)
-->

---
fold: true
marker: 31b956
at: 2026-05-07T16:16:26Z
root: seed-pack.KbpyVQ
---

<!--fold:31b956@file path="README.md" mode="644"-->
# tax.us.business

US business tax context for agents. What to know before answering a single tax question.

**Operating instruction:** This file orients — it does not cache current figures. Before quoting any dollar threshold, rate, or phase-out, fetch sources.md for the authoritative IRS source. Tax law changes annually; a stale figure is worse than no figure.

## The load-bearing mental model: entity choice drives everything

Every downstream tax answer depends on how the business is legally structured. Getting this wrong poisons the entire answer. Full entity-by-entity comparison is in entity-comparison.md — read it before answering any question that touches entity selection, payroll strategy, or owner compensation.

Quick reference:

| Entity | Default taxation | Pass-through? | Owner SE tax? |
|---|---|---|---|
| Sole proprietorship | Schedule C on owner's 1040 | Yes | Yes — on net profit |
| General partnership | Form 1065 + K-1s | Yes | Yes — on distributive share |
| LLC (single-member) | Disregarded entity (same as sole prop) | Yes | Yes — unless election made |
| LLC (multi-member) | Partnership by default | Yes | Yes — unless election made |
| S-corporation | Form 1120-S + K-1s | Yes | Only on W-2 wages, not distributions |
| C-corporation | Entity-level flat rate (fetch current rate) | No | No — owner is an employee |

An S-corp answer given to a C-corp is not a nuance error — it is a category error. Ask or confirm entity type before proceeding.

## Self-employment tax: structural mechanics

Sole proprietors and partners owe self-employment tax on net earnings. S-corp owners owe payroll taxes only on W-2 wages, not on distributions — this is the core S-corp tax advantage, and also the core IRS audit target (see failure mode #3 below).

Fetch sources.md → IRS Publication 15 and Publication 334 for current SE tax rates and the Social Security wage base (adjusts annually).

The deductible portion of SE tax (the employer-equivalent half) reduces adjusted gross income as an above-the-line deduction. Net SE income before applying the rate is reduced by a factor that removes the deductible half — fetch sources.md for the exact mechanics.

## The 5 things agents get wrong

**1. Conflating the three depreciation tools — Section 179, bonus depreciation, and MACRS are distinct.**

- **Section 179** (IRC §179): Immediate expensing of qualifying property in the year placed in service. Subject to an annual dollar cap and a phase-out above a total property purchase threshold — fetch sources.md for current limits, both change with inflation and legislation. Cannot create a loss; limited to business taxable income.
- **Bonus depreciation** (IRC §168(k)): Percentage-of-cost deduction in year one. The percentage has been stepping down since 2022 under the TCJA schedule — fetch sources.md for the current year percentage. Unlike §179, bonus depreciation can create a loss. Applies to new and used qualifying property.
- **MACRS** (Modified Accelerated Cost Recovery System): The default scheduled recovery — cost spread over asset class life (5-year, 7-year, 27.5-year residential, 39-year nonresidential, etc.) using declining balance methods. The fallback when §179 and bonus are exhausted or inapplicable.

The three tools can be layered: §179 first, bonus on remainder, MACRS on what's left. Mixing them up produces wrong deduction amounts and wrong year-of-deduction conclusions.

**2. The QBI deduction (§199A) is not a flat 20% — phase-ins, wage limits, and SSTB rules apply.**

- Qualified Business Income (QBI) deduction: up to 20% of QBI from pass-through entities (sole props, partnerships, S-corps, some trusts). C-corporations do not qualify.
- Below the taxable income threshold (fetch sources.md for current figure — inflation-adjusted annually): the deduction is generally 20% of QBI.
- Above the threshold: the deduction is limited to the greater of (a) 50% of W-2 wages paid by the business, or (b) 25% of W-2 wages plus 2.5% of unadjusted basis of qualified property (UBIA).
- **Specified service trades or businesses (SSTBs)** — health, law, accounting, consulting, financial services, athletics, performing arts, brokerage — phase out of the deduction entirely above the upper threshold. A high-income consultant may get zero QBI deduction.

Never quote "20% deduction for pass-through income" without flagging the wage/UBIA cap and SSTB phase-out. The answer differs substantially for a high-income attorney versus a high-income manufacturer.

**3. Employer payroll taxes are not optional overhead — they are a fixed cost of any W-2 relationship.**

- Employers match employee FICA on every W-2 dollar — Social Security portion (up to the SS wage base) plus Medicare. Fetch sources.md → Publication 15 for current rates and thresholds.
- Additional Medicare surtax on high-income employee wages: employer does not match this portion, but must withhold.
- FUTA: federal unemployment tax on first portion of each employee's wages. Fetch sources.md for current rate and wage base. Effectively reduced by state unemployment credit in most states.
- S-corp "reasonable compensation" requirement: an S-corp owner who performs services must receive W-2 wages. The IRS uses comparability to similarly-compensated employees in the same field. Underpaying wages to shift income to distributions is the most-audited S-corp position.

When computing the cost of hiring or incorporating, payroll taxes are not a footnote — they add meaningfully to every W-2 dollar before state unemployment layers are considered.

**4. State income tax nexus follows people, not registration — remote workers create it.**

- An employee (or sometimes a contractor) working from State X creates income tax nexus in State X, even if the business has no office there.
- Nexus obligations include: registering to do business, withholding state income tax on the employee's wages, possibly filing a state corporate income or franchise tax return in that state.
- Some states apply a "convenience of the employer" rule (New York is the primary example): remote work done outside the state for the employer's convenience, not necessity, is treated as in-state income.
- Federal law does not preempt state nexus rules; each state has its own threshold tests and economic nexus standards.

Flag state nexus early. Giving only federal guidance to any multi-state business is incomplete guidance.

**5. Quarterly estimated payments are required — failing them produces underpayment penalties.**

- C-corporations: must pay quarterly estimated taxes if expected liability exceeds a threshold. Fetch sources.md → Publication 542 for current threshold and due dates.
- Individuals (sole proprietors, partners, S-corp shareholders): must pay quarterly estimated taxes if expected liability after withholding exceeds a threshold. Fetch sources.md → Publication 505 for current threshold.
- Safe harbor: either a percentage of current-year tax or 100% of prior-year tax (higher-income taxpayers use a higher percentage — fetch current figures from sources.md). Meeting either safe harbor eliminates the underpayment penalty regardless of what is ultimately owed.
- Underpayment penalty is computed quarterly at the federal short-term rate plus a fixed margin — it compounds per quarter, it is not a flat late fee.

Any answer about business cash flow or tax planning that omits quarterly obligations is giving the owner an incomplete picture.

## Stable structural facts (these do not change with annual adjustments)

- C-corp income is taxed at the entity level, then again when distributed as dividends (double taxation). Pass-through entities avoid entity-level federal income tax.
- S-corp status requires a Form 2553 election; there are eligibility restrictions (100 shareholders maximum, one class of stock, US-person shareholders only). An LLC can elect S-corp treatment.
- Basis tracking is mandatory for partners and S-corp shareholders — distributions and losses that exceed basis create taxable income or suspended losses. Agents routinely ignore basis when it is often the binding constraint.
- The at-risk rules (IRC §465) and passive activity loss rules (IRC §469) layer on top of basis — a deduction allowed by basis may still be disallowed if the owner is passive. Real estate has its own passive activity exception for active participants and real estate professionals.
- Hobby loss rules (IRC §183) apply when an activity is not engaged in for profit — losses become non-deductible. The IRS presumes profit motive if the activity shows profit in 3 of 5 years (2 of 7 for horse activities). Agents must ask whether the activity is a legitimate business.

## What AI is changing

Automated bookkeeping tools (Bench, Pilot, Mercury, QuickBooks with AI features) are increasingly pre-categorizing transactions and flagging likely deductions — compressing the data-gathering phase of tax prep that once required accountant time. AI agents can now draft entity comparison analyses, model payroll tax scenarios, and generate first-pass Schedule C line items faster than manual methods. The structural tax law, however, does not change because an AI is applying it: an agent who misquotes a rate or misapplies the SSTB phase-out causes the same harm as a human who does.

What stays human: the election decisions (S-corp election timing, §179 vs. bonus depreciation strategy, retirement plan selection), audit-risk assessment, reasonable compensation determinations for S-corp owners, and any year-end tax minimization moves that require judgment about the owner's personal situation alongside the business. Agents should frame output as analysis and flag decision points explicitly — "this depends on your overall AGI and marginal rate, which requires your full return" is the right posture, not a concluded recommendation.
<!--fold:31b956@file path="entity-comparison.md" mode="644"-->
# entity-comparison

Tax-driven comparison of US business entity types. Use this file when the question involves entity selection, conversion, restructuring, owner compensation strategy, or any scenario where the entity type is uncertain or under discussion.

This file covers the tax dimensions only. Liability protection, governance, investor requirements, and state-specific formation rules are outside its scope — but they constrain entity choice in practice and belong in the full picture.

---

## The five entities and their tax treatment

### Sole proprietorship

**Formation:** Automatic. No filing required. A person conducting business individually is a sole proprietor by default.

**Federal income tax:** All net profit flows to the owner's Form 1040, reported on Schedule C. The business has no separate tax return.

**Self-employment tax:** The owner pays SE tax on net Schedule C profit. Fetch sources.md → Publication 334 for the current rate and the Social Security wage base. The employer-equivalent half of SE tax is deductible above-the-line on Form 1040.

**Key mechanics:**
- Net operating losses from the business offset other income on the owner's 1040 (subject to basis, at-risk, and passive activity rules).
- No payroll tax obligation until the owner hires employees — at which point the employer payroll tax obligation begins on employee wages, not the owner's own SE income.
- QBI deduction (§199A) potentially available — up to 20% of net QBI subject to SSTB rules and income thresholds.

**Why owners choose it:** Simplicity. No separate return, no payroll tax on owner draws, minimal compliance cost. Works well at low income levels where SE tax savings from incorporating don't yet justify the overhead.

**Tax trap:** At higher net income, paying SE tax on every dollar of profit instead of splitting between W-2 wages and distributions (as in an S-corp) becomes expensive. The crossover point depends on current SE tax rates and payroll administration costs — model it before recommending.

---

### General partnership

**Formation:** Two or more people conducting business together. A partnership agreement is strongly advisable; state filing may or may not be required.

**Federal income tax:** The partnership files Form 1065 (an informational return) and issues K-1s to each partner. Partners report their distributive share on their individual returns — income, loss, deductions, and credits flow through in the character generated by the partnership.

**Self-employment tax:** General partners pay SE tax on their distributive share of ordinary business income. Limited partners generally do not (unless they receive guaranteed payments).

**Key mechanics:**
- Partnership taxation is flexible: allocations can differ from economic ownership (within the "substantial economic effect" rules of IRC §704(b)).
- Basis tracks contributions, allocated income, and draws; partner basis includes their share of partnership liabilities.
- Guaranteed payments (fixed amounts paid to a partner regardless of profit) are treated as SE income to the recipient and as a deductible expense to the partnership.
- QBI deduction potentially available to partners on their distributive share.

**Tax trap:** Partners often underestimate basis complexity. A loss in excess of basis is suspended — not deductible in the current year — until basis is restored. Agents who ignore basis when quoting deductible losses are wrong.

---

### LLC (single-member)

**Formation:** State articles of organization. One owner.

**Default tax treatment:** Disregarded entity — the IRS treats a single-member LLC as a sole proprietorship for federal tax purposes. The owner files Schedule C. No separate federal tax return unless an election is made.

**Elections available:**
- **S-corp election (Form 2553):** Causes the LLC to be taxed as an S-corp — owner must pay reasonable W-2 wages, distributions not subject to SE tax or payroll tax. Requires meeting S-corp eligibility rules.
- **C-corp election (Form 8832):** Causes the LLC to be taxed as a C-corp. Rarely chosen absent a specific reason (e.g., venture capital structuring requirements).

**Key mechanics:**
- State law still provides liability protection even when the entity is a disregarded entity for federal tax purposes.
- A single-member LLC that makes no election files exactly like a sole proprietor — Schedule C, SE tax on net profit.

**Tax trap:** Owners frequently believe "LLC" confers tax advantages by itself. It does not — the default treatment is identical to a sole proprietorship. The tax advantage, if any, comes from an S-corp or C-corp election, not from the LLC form.

---

### LLC (multi-member)

**Formation:** State articles of organization. Two or more owners.

**Default tax treatment:** Taxed as a partnership. Files Form 1065; issues K-1s to members. All the partnership mechanics above apply.

**Elections available:** Same as single-member LLC — S-corp or C-corp via Form 8832 / Form 2553, subject to eligibility rules.

**Key mechanics:**
- A multi-member LLC that makes no election is a partnership for all federal tax purposes.
- Operating agreements govern economic arrangements; tax allocations must comply with IRC §704(b).

---

### S-corporation

**Formation:** Requires either (a) incorporating a C-corp under state law, then filing Form 2553, or (b) forming an LLC and electing S-corp status via Form 2553. Eligibility requirements: no more than 100 shareholders, all shareholders must be US persons (individuals, certain trusts, certain estates), only one class of stock.

**Federal income tax:** Pass-through — the S-corp files Form 1120-S (informational return) and issues K-1s. Shareholders report income and loss on their personal returns.

**Payroll tax mechanics (the core S-corp advantage and audit target):**
- An S-corp owner who performs services for the business must receive W-2 wages — "reasonable compensation."
- Only W-2 wages are subject to payroll taxes (FICA). Distributions above the wage component are not subject to payroll taxes.
- This split — wages + distributions — is the tax savings mechanism. A sole proprietor pays SE tax on 100% of net profit; an S-corp owner pays payroll taxes only on the wage portion.
- The IRS intensively scrutinizes S-corps where the wage component is implausibly low relative to distributions. The standard is comparability: what would a similarly skilled employee earn for the same services?

**Key mechanics:**
- Shareholder basis tracks stock basis and separately tracked loan basis. Losses cannot exceed basis; distributions in excess of basis are capital gains.
- Built-in gains tax (IRC §1374) applies if the corporation was previously a C-corp — passive income and gains realized within a recognition period are taxed at corporate rates. Fetch sources.md → Publication 542 for current details.
- Shareholders with more than 2% ownership cannot participate in tax-free fringe benefits that employees can (health insurance premiums are deductible but must flow through W-2 wages for >2% shareholders).

**Why owners choose it:** Payroll tax savings on the distribution portion of profit. At meaningful net income levels, the SE tax avoided on distributions exceeds the cost of running a payroll and filing a corporate return. The break-even depends on current SE tax rates, payroll service cost, and state tax considerations — model it before recommending.

**Tax trap: the "reasonable compensation" problem.** Setting wages too low to maximize distributions is the most-audited S-corp position. When the IRS reclassifies distributions as wages, the back payroll taxes, interest, and penalties often exceed what was saved. A reasonable wage is not what the owner needs to live on — it is what the market pays for the services performed.

---

### C-corporation

**Formation:** State articles of incorporation plus federal EIN.

**Federal income tax:** Entity-level tax at a flat rate on corporate taxable income. Fetch sources.md → Publication 542 for the current rate.

**Double taxation:** Dividends paid to shareholders are taxed again at the shareholder level — at qualified dividend rates if the shareholder is an individual. This is the structural disadvantage of the C-corp for small businesses: income is taxed twice before reaching the owner's pocket.

**Key mechanics:**
- C-corps are not pass-through entities — no K-1s, no personal liability for corporate tax.
- QBI deduction (§199A) is not available to C-corp shareholders on corporate income.
- Compensation to owner-employees is deductible at the corporate level (before entity-level tax), which is a partial mitigation of double taxation: paying the owner a market salary reduces corporate taxable income.
- Retained earnings can accumulate at the corporate level — useful when the owner's personal marginal rate exceeds the corporate rate and cash is being reinvested in the business rather than distributed.
- C-corps are required for some investors (VC funds structured as partnerships often cannot hold pass-through equity) and for equity incentive programs (ISOs require C-corp status).

**Why owners choose it:** Outside investment requirements, lower entity-level rate relative to owner's personal rate (in specific retained-earnings scenarios), access to certain employee benefit plans, and isolation of business tax from personal returns. For most small businesses without outside investors, the pass-through entities are more tax-efficient.

**Tax trap: accumulated earnings tax.** C-corps that retain earnings beyond the reasonable needs of the business can be subject to the accumulated earnings tax — an additional tax designed to prevent corporations from sheltering undistributed personal holding income. Agents working with cash-rich C-corps should flag this.

---

## How to reason about entity choice

Entity selection is a multi-variable problem. The variables:

**1. Net income level.** Below a low income threshold, SE tax savings from an S-corp election don't justify payroll administration costs. Above that threshold, the math begins to favor S-corp. The crossover is not fixed — it depends on current SE tax rates, payroll service cost, state franchise or minimum taxes on corporations, and the owner's marginal income tax rate.

**2. Number and type of owners.** S-corp eligibility rules limit flexibility (100-shareholder cap, one class of stock, US persons only). A business expecting outside investment, multiple share classes, or foreign owners cannot use S-corp status.

**3. State tax treatment.** Some states do not recognize S-corp elections — they tax the entity as a C-corp at the state level, eliminating the state-level pass-through benefit. Some states impose a franchise or minimum tax on LLCs and corporations regardless of income. Always layer state tax onto a federal-only analysis.

**4. Exit strategy.** C-corps held long enough can be sold as stock eligible for Qualified Small Business Stock (QSBS) exclusion under IRC §1202 — potentially excluding a large portion of gain from federal capital gains tax. Pass-through entities do not qualify. For founders expecting a significant exit, this can outweigh the entity-level tax disadvantage.

**5. Conversion costs.** Converting from one entity type to another is often taxable. Converting a C-corp to an S-corp triggers the built-in gains recognition period. Converting an S-corp to a C-corp may trigger tax on previously untaxed accumulated adjustments. Entity choice made at formation is easier to live with than a conversion under time pressure.

**The right framing for an agent:** Entity selection requires knowing the owner's current income, expected growth trajectory, state of formation and operation, ownership structure, exit horizon, and benefit plan needs. Offering a definitive recommendation without those inputs is premature. What agents can appropriately do: map the structural differences, flag the decision points, and model scenarios when given the numbers.

---

## Conversion and election mechanics (reference)

| Move | Mechanism | Key tax consequence |
|---|---|---|
| Sole prop → LLC (default) | State filing | No tax consequence; still Schedule C |
| LLC → S-corp | Form 2553 (may need Form 8832 first) | Triggers payroll obligation; need reasonable wage going forward |
| S-corp → C-corp | Revoke S election | Accumulated adjustments account (AAA) considerations; begins built-in gains clock reset |
| C-corp → S-corp | Form 2553 (within deadline) | Built-in gains recognition period begins |
| Partnership → Corp | IRC §351 exchange possible | Often tax-free if structured correctly; entity-level depreciation recapture risk |

Deadlines matter: S-corp elections are generally due by the 15th day of the 3rd month of the tax year for which the election is to be effective. Missed elections require IRS relief procedures.
<!--fold:31b956@file path="sources.md" mode="644"-->
# sources

Fetch these at task time. Ordered by importance. Current-year figures (rates, thresholds, wage bases) always come from here — not from the README, not from training data.

1. IRS Publication 334 — Tax Guide for Small Business. Primary orientation for sole proprietors, partnerships, and S-corps: Schedule C mechanics, SE tax, deductible expenses, entity-level obligations.
   https://www.irs.gov/publications/p334

2. IRS Publication 946 — How to Depreciate Property. MACRS class lives and recovery tables, Section 179 current dollar limit and phase-out threshold, bonus depreciation current-year percentage.
   https://www.irs.gov/publications/p946

3. IRS Section 179 and bonus depreciation current limits — the annual Revenue Procedure updates §179 dollar caps and the TCJA bonus phase-down schedule. Always fetch the most recent year:
   https://www.irs.gov/businesses/small-businesses-self-employed/section-179-deduction-temporary-100-percent-expensing-for-business-assets

4. IRS Section 199A (QBI deduction) guidance — rules, wage/UBIA limitations, SSTB definitions and phase-out thresholds (inflation-adjusted annually):
   https://www.irs.gov/newsroom/qualified-business-income-deduction

5. IRS Publication 15 (Circular E) — Employer's Tax Guide. Current FICA rates, Social Security wage base, withholding tables, FUTA rate and wage base, employer obligations:
   https://www.irs.gov/publications/p15

6. IRS Publication 505 — Tax Withholding and Estimated Tax. Safe harbor percentages, underpayment penalty mechanics, quarterly due dates, current thresholds for individuals:
   https://www.irs.gov/publications/p505

7. IRS Publication 542 — Corporations. C-corp estimated tax threshold and due dates, corporate tax rate, dividend treatment:
   https://www.irs.gov/publications/p542

8. IRS Publication 925 — Passive Activity and At-Risk Rules. Basis interaction with at-risk and passive activity limitations; real estate professional exception:
   https://www.irs.gov/publications/p925
<!--fold:31b956@end-->
PORTDOWN_08568D64

# ── post ──
MARKER=$(awk '/^---$/ { f++; if (f==2) exit; next } f==1 && /^marker:[[:space:]]/ { sub(/^marker:[[:space:]]+/, ""); print; exit }' "$DEST")
[ -z "$MARKER" ] && { echo "seed: archive has no marker — corrupt" >&2; exit 1; }
awk -v m="$MARKER" -v outdir="$TARGET" '
  BEGIN {
    # Match <!--fold:<m>@file path="X"--> with an optional mode attr after
    # the path (fold emits  mode="644"  on executables).
    file_re = "^<!--fold:" m "@file path=\"([^\"]+)\"( mode=\"[0-9]+\")?-->$"
    end_re  = "^<!--fold:" m "@end-->$"
  }
  $0 ~ end_re { if (current) close(current); exit }
  $0 ~ file_re {
    if (current) close(current)
    line = $0
    sub(/^<!--fold:[^@]+@file path="/, "", line); sub(/".*$/, "", line)
    current = outdir "/" line
    dir = current; sub(/\/[^\/]*$/, "", dir)
    if (dir != current) system("mkdir -p \"" dir "\"")
    printf "" > current
    next
  }
  current { print >> current }
' "$DEST"
SEED_EXTRACTED=$(find "$TARGET" -type f -not -path "$DEST" 2>/dev/null | wc -l)
if [ "$SEED_EXTRACTED" = "0" ]; then
  echo "seed: archive contained no files — refusing to delete the source" >&2
  echo "  archive preserved at: $DEST" >&2
  exit 1
fi
rm -f "$DEST"

echo "" >&2
echo "✓ seed unpacked → $TARGET ($SEED_EXTRACTED files)" >&2
find "$TARGET" -type f | sort | while IFS= read -r _sf; do
  echo "  ${_sf#${TARGET}/}" >&2
done
echo "" >&2
if [ -f "$TARGET/SKILL.md" ]; then
  echo "This seed contains a skill (SKILL.md). Install it in your agent's skills directory." >&2
  echo "" >&2
fi
echo "Install the seed skill if not already installed:" >&2
echo "  https://seed.show/skill" >&2
echo "" >&2
echo "Publisher prompt:" >&2
sed 's/^/  /' >&2 <<'__SEED_PROMPT_END_AC1F2B__'
You have the US business tax context. Read README.md for the five agent failure modes and operating instruction. Read entity-comparison.md before any question touching entity selection, owner compensation, or payroll strategy. Fetch sources.md for current rates and thresholds — never quote figures from training data. Then ask what business tax question to work through.
__SEED_PROMPT_END_AC1F2B__
exit 0