Discussion:S-Corp Passive Ownership
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Taxpayer joe (talk|edits) said: | 25 January 2007 |
| Info: Husband and Wife are 50/50 owners in an S-Corp. Husband performs 100% of the work and the wife has no other employment. The husband plans on paying himself a reasonable salary and pay prorata distributions if the company turns a profit. In other words, 10k net profit, 5k distribution to husband & 5k distribution to wife in order to remain in compliance with the ownership %s.
Question 1: Can the wife be classified as passive? My thought is no since the husband's participation is material. Thoughts? Question 2: If the husband pays the wife a small salary in commensurate with the duties she performs, will she run into an unreasonably low compensation issue since her 50% equal distribution might be greater than her small salary? What if she performs no services and isn't paid a salary, yet can't be classified as passive but receives her 50% distribution? Question 3: Assume the two shareholders were not related and the company had a profit. Shareholder 1 performed all of the services in the company and paid himself a reasonable salary. Shareholder 2 was not involved in the operations. Could Shareholder 2 be classified as passive and be able to receive her 50% share of the distribution without dealing with an unreasonably low compensation issue? Thanks in advance. | |
| January 25, 2007 | |
| To shortcut thru your questions...IRS considers joint ownership of the S as owned by one for practical purposes. So she's not required to take a salary. As to 3, IRS also isn't concerned that everyone is taking a salary, merely that someone is. So if there's reasonable comp, all is well. Until further notice. | |
| January 25, 2007 | |
| >>If the husband pays the wife a small salary in commensurate with the duties she performs
Didn't you say that the husband performs 100% of the work? >>Question 1: Can the wife be classified as passive? My thought is no since the husband's participation is material. Thoughts? Is this a "dirty" question? LOL | |
| 25 January 2007 | |
| "5k distribution to husband & 5k distribution to wife" Which both end up at the MFJ return :P. Same goes for the salary to the husband :P
I am not sure what you are trying to achieve... The whole amount of salary combined by husband and wife will be on the 1040 as MFJ as well as the distributions. Do they have passive activity losses disallowed in the prior years? | |
Taxpayer joe (talk|edits) said: | 25 January 2007 |
| Thanks, JR1.
So, essentially, she's considered to have materially participated as well, given the spousal relationship and his reasonable salary would suffice for both. In an event were the two shareholders were unrelated, would the IRS take issue to Shareholder #2 receiving a distribution while materially participating, yet receive no salary? | |
| 25 January 2007 | |
| Deback
She can be passive, you'll never know lol. To the point where the poster questioned passive, I was assuming that there are passive losses disallowed in prior years. | |
Taxpayer joe (talk|edits) said: | 25 January 2007 |
| Pegoo,
The husband/wife were primarily concerned with the unreasonably low comp issues, unequal distribs, etc, thus were trying to run the S as if the shareholders are unrelated. | |
| January 25, 2007 | |
| In your last query joe...yes, a materially participating owner without a salary would be a concern. If it's a spouse, technically it's supposed to be, but I've never experienced that problem where only one spouse had a salary and should have had both on. | |
