Discussion:Dividends (or Distributions)
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Discussion Forum Index --> Basic Tax Questions --> Dividends (or Distributions)
Discussion Forum Index --> Tax Questions --> Dividends (or Distributions)
| 15 January 2008 | |
| I have a client who is a S-corp. All personal expenses paid by the s-corp I am treating as a distribution. Do all distributions have to be slit pro-rata among the shareholders or can each shareholder take any amount? I was reading something about dividends needing to be shared according to ownership or the IRS could deem that the S-corp has more than one class of stock which would then make it ineligible to be classified as an s-corp. I am not sure I am clear about the difference between dividends and distributions. | |
| January 16, 2008 | |
| C corps have dividends not deductible to the Corp, but income to the recipient.
S corps have distributions and yes, the distributions have to been done equitably on the basis of ownership to prevent losing the S election. There was a thread on this earlier in the year. And if the reason(or one of them) for the incorporation was liability protection, I'd be careful about paying personal expenses with corp. checks. Do distributions to the shareholders, then let them pay their personal expenses themselves. Any of you attorney folks out there agree with this??? I have several clients who pay their personal expenses with S-corp checks and it makes me a little nervous. | |
| 16 January 2008 | |
| Thank you for your help, however I want to make sure I am clear.
In this example, I have three owners, 2 own 45% and one owns 10%. If say the 2 45% shareholders have taken out $45,000 each in distributions for 2007 and the 10% owner did not take anything out then they may be in danger of having there s-corp reclassified as a c corp? The two owners whom own 45% take out a regular monthly distribution and the 3rd 10% owner gets nothing - so it sounds like they are going to have to make a change here. Plus all of the owners constantly use the corporate credit card for personal meals, etc. This I was changing to a distribution. Am I on the right track with this? What about debiting Distributions and crediting Distributions Payable for the amount needed to get everyones distributions equal according to their ownership percentages.(assuming the clients want to go ahead and pay the difference) | |
| 16 January 2008 | |
| In the first place, if any of the owners provide services to the corporation, those owners MUST be paid a salary commensurate with the value of the services they provide, at least up to the amount of cash or property that is distributed to them. The salaries are deducted along with other corporate expenses, and the resulting net income (if any) is reported on the K-1's, 45%, 45% and 10% respectively. The K-1 amounts can be distributed (paid) to the stockholders at any time without tax consequence, since they will pay tax on all of that income whether distributed or not. However, distributions of net income (as opposed to salaries) MUST be in accordance with the percentage of ownership. Otherwise you are potentially creating a second class of stock and blowing the S election.
A "catch-up" distribution, if made within a reasonable time after the unequal distribution is discovered, can avoid disqualification of the S election. Here we are at the beginning of a new year. Now is the time to get the salaries straightened out and start the stockholder-employees on the right track. NO personal expenses should EVER be paid by the corporation. Pay the stockholder-employees salaries and make distributions of the remaining net income in accordance with stock ownership and let them pay their own personal expenses. Whether you go back and try to do salaries for 2007 (which will result in interest and penalties, and the necessity to gross up the salaries to cover the payroll taxes) is a judgment call. | |
| January 16, 2008 | |
| Also note that your best bet is NOT to classify monies taken as distributions. Classify them as NP's-Shareholders. Yes, I know, they'll be debits since the money is going out. At year end, when you close the profits, DISTRIBUTE the profits to the notes and then see where everyone ends up. If a S/H is still 'upside down' meaning that they owe the company money, you've got a problem to deal with. And find someone near you who can help guide you in S's. They are wonderfully marvelous, but also treacherous for the unwary. Like walking around a flowing volcano. | |
| 16 January 2008 | |
| I am aware of the salary requirement for a s-corp and all of the shareholders do take appropriate salaries. Right or wrong, the reason they also take a distribution is they feel they have a right to it as they contributed a few million dollars of property to the s-corp while the other 10% owner did not.
The two shareholders who received most of the distributions already have NP's to themselves so I will offset the distributions as much as I can with that and see where I end up. Is the catch up distribution something that needs to be disclosed on a tax return somewhere? I have so many clients who use the company credit card for their own personal expenses once in a while knowing that I will recategorize it as a owner draw when it comes to cleaning up their books for taxes. I assume that doing this isn't an issue with partnerships or sole prop's. Thanks for everyones input...it is all appreciated! | |
| 16 January 2008 | |
| The Tax Court has held on numerous occasions that a corporation’s payment of personal expenses is treated as compensation to the extent that such payments do not exceed a reasonable salary.
I doubt that the corporation’s payment of personal expenses would create a second class of stock unless the payments were made under “governing provisions.” | |
