Discussion:C-Corp Stockholder's distribution treated as "Consulting Services"
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> C-Corp Stockholder's distribution treated as "Consulting Services"
Discussion Forum Index --> Tax Questions --> C-Corp Stockholder's distribution treated as "Consulting Services"
| 15 March 2008 | |
| Hi,
I'm relatively new as an independent tax professional, and that's the first time I see this situation. Can anybody advise? C-Corp, which is the Consulting Engineering Business is owned 100% by the individual who is providing his consulting services through the C-Corp. (The previous CPA was going to file the S-Corp election, but somehow the election didn't take an effect. This CPA also disappeared, so I can't ask him anything :) ) During 2007 he has not even paid salary to himself, because revenues were intermittent. This previous CPA was having a pattern for few years to bring the C-Corp net income to zero (either with or without W2s) by deducting "Consulting" expense and picking-up this amount as "Consulting Income" (subj. to SE tax) on the individual tax return. So first, is this legitimate? Second, why was he zeroing out the Corp. net income - because of the possible issues with Personal Service Corp.? And what would be the right way to handle it from now on? (The guy actually does use this Corp. money for his personal expenses, - messy structure of one business account used by both business and individual.) | |
| 15 March 2008 | |
| Payments to a shareholder-employee are generally regarded as remuneration for services rendered to the extent that the amounts received by the shareholder do not exceed what would generally be regarded as a reasonable salary. Since the consultant is under the control of the corporation, the consulting fees should be reported on Form W-2. | |
| 16 March 2008 | |
| And for 2007, isn't it too late to "run" this distribution through W2 now? (The Corp. is accrual basis one, but he is the "related person". Can the Corp. deduct this amount in '07, while he'll recognize the income in '08?) | |
| March 16, 2008 | |
| Pretty late for a W2, I agree. And you must be in the same years, you're correct. Deduct on corp in 07 and it's 07 income to his 1040. And file the S election today. | |
| 16 March 2008 | |
| Thank you both for your replies. But then I'm back to square one. What kind of income would it be for him for '07: subject to SE?
(And regarding filing the S election today, there is another problem: the guy hasn't filed his taxes since 2000. (Don't ask me how that happened, I don't know :) He paid some estimates on his personal taxes, nothing for the Corp. So I guess until we are done catching up with prior years' returns, we'd better not ask IRS about "extras".) If I'll leave this as income to Corp. and put it as distribution in the form of dividends to the guy, another uncertainty here is accumulated E&P and Paid-In-Capital - we just don't know the up-to-date number yet. Again, I'd appreciate your advises here, especially because haven't dealt with similar cases before. | |
