Discussion:Personal Service Corporation (PSC) Draws?
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Discussion Forum Index --> Accounting Questions --> Personal Service Corporation (PSC) Draws?
| 3 August 2009 | |
| I have a new client that is a criminal attorney and he said that he “formed” a PSC. He must have liked the sound of PSC because he doesn’t realize that being a PSC is more of a mandate than a choice and he also didn’t elect S-Corp status. I now have two boxes of information from 2008 that I need to turn into financial statements and I am learning that the client is not acting like a PSC, but more like a sole proprietor and is taking draws from the PSC bank account for cash, drycleaning, ,etc. and did not take a reasonable salary. How should these “draws” be reclassified? How do I handle the salary component? Any ideas? | |
| 4 August 2009 | |
| Yes, has to reform! LOL.
However, I am not sure what to do with 2008. Any thoughts on how to fix the problem? They are definitely not expenses of the corporation. | |
Actionbsns (talk|edits) said: | 7 August 2009 |
| Can you book the draws as a loan to shareholder in 2008, then clear it in 2009 as payroll? I had to do this with a PSC last year and it worked well. Once the client understood the need to change his ways and keep the expenses within the corporation, he was a lot more amenable to changing his methods. | |
Outwesttax (talk|edits) said: | 1 October 2009 |
| The short answers above are muddled to me. So...
The lawyer may have formed what is in my state a "PA" or professional association. If it remains a C corp with most of it's income from certain designated professions it is now a "PSC" for tax purposes. As a PSC, earnings of the corporation are taxed at a 35% flat rate. The general strategy to avoid that unpleasant result is to zero out the corporation with officer payroll. Paying out dividends or taking a loan will not affect that nasty result. If this truly is a PSC, the bad news is already in. The best remaining course is to take the dividends at the low rates we now have and go on. The only possible use of a loan is to pospone recognition of dividends until they are qualified dividends. I think trying that is pretty shaky. At this point the attorney is stuck for 09 as well, but at least there is time to zero out with payroll and load up all the fringe benefits you can this year and prepare the S election for 2010. | |
| 1 October 2009 | |
| Good advice Outwesttax. I would also ask for a copy of the organizing document so you know exactly what type of entity you are dealing with. That document always has a special place in my client file! | |
