Discussion:S-corp, no payroll and no distribution
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Discussion Forum Index --> Advanced Tax Questions --> S-corp, no payroll and no distribution
Discussion Forum Index --> Tax Questions --> S-corp, no payroll and no distribution
| 16 January 2008 | |
| single s/h, s-corp (home remodeling) client. he takes NO payroll and NO distributions; his wife's salary is enough to support family. i know when he does take money out, it must 1st be 'reasonable salary' and 2nd s/h distributions. however, he's not taking any money out (about $50k net profit this year). should i advise him that he MUST take some reasonable salary out anyway?? he doesnt need the money, so it seems odd to make him take the money out (even though i know he's avoiding the fica piece by not taking any salary at all, but still...).
thanks! | |
| 16 January 2008 | |
| He has a option not to take any money out or even pay himself. The reasonable salary part kicks in when he starts to take distributions. The 50k will be reported to him on his K-1 for tax purposes. | |
| 16 January 2008 | |
| SO let's take this to the level of the ridiculous:
I have 3 S Corps. If I take NO salary from any, I have: Corp 1 - $50,000/year profit Corp 2 - $50,000/year profit Corp 3 - $50,000/year profit So, I decide I need money, and take $50,000/year reasonable salary from Corp 1 in years 1-3 (no distributions from others). Then years 4-6, take $50k salary from Corp 2 (no distributions from others) Years 7-9, same from Corp 3. Now, in Year 10, I have 300,000 in retained earnings/AAA in each company (for which I have already paid tax per my K-1s). Can I now take a $50,000 salary and a $300,000 distribution from each and have this be 'reasonable'???? After all, I have already paid the tax on the $300,000.
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| 16 January 2008 | |
| Dennis, I lost my schedule, and besides, the returns from years 1-7 are past the SOL.
(HA HA, isn't that convenient?) | |
| 16 January 2008 | |
| Seems to me IRS' litigation position on this is quite simple, and because it's the only one statute allows. Any distributions (year of profit don't matter) which are disguised comp is subject to FICA. The word "reasonable" does not appear in the FICA statute, but it can bear upon whether a distribution is disguised comp.
Here, it's just like C Corp cases. A high salary in the current year can make up for low comp prior years. Conceptually the same thing can occur in an S Corp, no? Stat limes are not relevant. It's the year of the cash/property distribution under the FICA statutes, which use the unequivocal word "paid." | |
| 16 January 2008 | |
| I put in the stat times to make this interesting because of course, the IRS would never know that you Didn't take reasonable comp in prior years, only the years in audit.
And of course, the taxpayer will conveniently forget whether he took comp those closed years, or even if he worked in the corps. I would think that this would make it very difficult for the IRS to argue that $350 should be comp in a year when cash flow profit was only $50. | |
| 16 January 2008 | |
| But even if you did claim $350k comp from all 3 corps, there would still be a very significant FICA savings, as the taxpayer would be over the OA portion in all corps, and get credit for excess FICA for 2. The only 'waste' would be the employer matching OA portion from 2 companies.
A HUGE savings of about $58,000 from this year alone!!!! (plus the time value of money) | |
| 16 January 2008 | |
| From a Tax Preparer's stand point, we are all calling foul... What if the client needs that 50k cash to purchase an capital asset next year? Would you propose he take salary now and loan it back to the SCORP? I'm not talking about having 3 SCORPs but just this 1 SCORP. Wouldn't it depend on the client's intent? In the past, I have seen people not taking salaries and distros which raised a flag as a conjecture. I have decided to ask and tell them about reasonable compensation and distributions and 9/10 people tells me the money is needed. At first I think all of them are just trying to avoid taxes. After further communication, I see it on their financial stand point.
As you know, 50k salary / 300k distribution will get an audit hands down. You know the IRS will have to yell foul and say disguised income. Just my opinion. Living in a fantasy world here ^_^ | |
| January 16, 2008 | |
| I have one client who has never taken a dime out of the corp. And I'm wondering. And waiting...I expect that they're waiting for retirement, tho' they are both of that age already, and will then start taking money. One thing I know, it'll have to be salary. And supposing that they'll have no further business at that point, that will kick up a loss each year. But they'll have plenty of basis. So they won't avoid a thing, merely delay it. Which ain't all bad. But I can't imagine requiring a salary when there's no money taken. . . | |
| 16 January 2008 | |
| From another perspective - and I know the issue is really whether or not the scenario would fly - but do you think the taxpayer would be better off with the payroll tax savings or with taking the money out using a reasonable comp./distribution arrangement and investing it (its just sitting there anyway) or taking it all in wages and contibuting to a SEP or some other retirement vehicle? Any thoughts. | |
| January 16, 2008 | |
| Good questions. You didn't even hit the one I was thinking about, whether the benefit of SS benefits received when they file would offset the payment of SS taxes later on that they wouldn't receive immediate benefit from. I'm not sure that even makes sense to me. Trying again. IF paying the SS taxes is inevitable, which it is either along the way, or later when they take the money, if they don't pay in along the way, they have little to no SS benefit until they start taking the wages. Of course, unless they have other SS income from wages at other jobs, etc. So their benefits are delayed, as are their payments. I just wonder if they don't hurt themselves. Or is the tax free build up of the investment over time make more? | |
| 16 January 2008 | |
| An 1120-S with $50K profit and no officer salary would trigger an audit even without distributions, no? | |
| January 16, 2008 | |
| Good point. Probably will. What are you going to do? Well, it depends on how they program. Since there are NO distributions, and the AAA clearly builds...but is the program to pick 'em that sharp? | |
| 16 January 2008 | |
| It depends. As long as the tax payer has legitimate reason for not taking salary / distributions. One of the general reasons are capital required for a subsequent acquisition and actually purchases it. | |
| 16 January 2008 | |
| "An 1120-S with $50K profit and no officer salary would trigger an audit even without distributions, no?"
Nope. No audit issue, if no distributions. "I would think that this would make it very difficult for the IRS to argue that $350 should be comp in a year when cash flow profit was only $50." Do you mean cash distribution of prior year accumulated profits (and years of low comp)? No problem for IRS. Disguised comp from money accumulated in the bank account. "....the IRS would never know that you Didn't take reasonable comp in prior years, only the years in audit." Yes they would. Off the face of returns and K-1's, and their online file of W-2's. | |
