Discussion Archives:Disputed tax period owner employee compensation

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Discussion Forum Index --> Advanced Tax Questions --> Disputed tax period owner employee compensation


Discussion Forum Index --> Tax Questions --> Disputed tax period owner employee compensation

Cpa2112010 (talk|edits) said:

18 November 2010
I inherited a client whose previous CPA claimed wages in year x on the 1040 and claimed the deduction for wages on the 1120 in year x + 1. How should this be corrected while still minimizing - legally - tax burden to the client? My initial assumption is that the 1120 will lose the wage expense deduction. Is there any way this could be avoided?

Kevinh5 (talk|edits) said:

18 November 2010
[Note: this response was written before it was revealed (surprise!) that the corp was on a fiscal year. Therefore, this response has been deleted as it is incorrect. Amazing what a difference complete information on the part of the original poster makes on the answer.]

Cpa2112010 (talk|edits) said:

18 November 2010
Would one year in the past then have to have double wages?

Kevinh5 (talk|edits) said:

18 November 2010
well, if you want my legal and ethical opinion, how do you deduct two year's worth of compensation when only one year's worth was actually paid? This isn't even the common accrual, this is the reverse. No, you can't deduct two year's worth, the client should sue the prior CPA for malpractice to get his tax money back.

AEM CPA (talk|edits) said:

18 November 2010
I trust you are not purporting to actually issue a legal opinion given your lack of a license to practice law....

Cpa2112010 (talk|edits) said:

18 November 2010
My problem is finding the resource to prove to my client that this is totally not ok. Can anyone help on that? I agree with Kevinh5 that this prior CPA...had some issues.

CATaxAtty (talk|edits) said:

18 November 2010
Perhaps the two employ different methods of accounting? For instance, if the corporation is on the accrual method and the employee is on the cash method, this reporting could be proper - (for instance, where the corporation advanced the compensation and was required to wait until economic performance occurred).


Barring this, I would do what Kevin suggests.

Dennis (talk|edits) said:

18 November 2010
Criticizing the prior accountant without a clue for why he decided client had taxable income in the year prior to the year the corporation took a deduction for the expense seems incompetent to say the least. From the standpoint of corporate tax the entry is probably a wash. (Yes, you can construct scenarios in which tax liability was artificially reduced.) We are told this is wages, which means payroll tax filings and the issuance of a w-2. Logically there would have been correspondence about the wage discrepancy. You obviously do not have the records. If you have no way to talk with the prior accountant, leave it alone. You have no idea what happened, no idea how to fix it if it actually is wrong and no indication that any of this will affect your current engagement.

Seaside CPA (talk|edits) said:

18 November 2010
Did you check to see if the corporation is on a fiscal year?

Cpa2112010 (talk|edits) said:

18 November 2010
No the corporation is a 11/30 year end. And I do have W-2 documentation. I don't see how it's ethical to not know what he did and therefore not fix it. The question at hand is: Is this blatantly and always wrong to report compensation of officers in this manner.

Smokeytax (talk|edits) said:

18 November 2010
So, if wages were paid 12/1/2008, they would have been included as income on the 2008 form 1040, and deducted on the form 1120 for the year ended 11/30/09.

Cpa2112010 (talk|edits) said:

18 November 2010
Yes

Smokeytax (talk|edits) said:

18 November 2010
That's good news then - the prior returns are correct.

Seaside CPA (talk|edits) said:

18 November 2010
If the corporation is reporting on an 11-30 year end, the officer comp line will not normally tie into the W-2 amount (unless receiving same pay each pay period) reported on the individual's tax return.

Dennis (talk|edits) said:

18 November 2010
Fiscal November does add some clarity...♫ Certainly less reason for a decision that the prior accountant was wrong. I can't imagine a situation where there would be no professional courtesy. If prior accountant has issues and will not divulge he will at least tell you why. Again, absent a complete reconstruction of the clients books you have given us no reason for your supposed "ethical" dilemma.

Tax Writer (talk|edits) said:

18 November 2010
I agree with Dennis that this return could be correct, based on the fiscal year differences, plus, you didn't mention if the Corp was on the cash basis?

If you are so worried about it, just call the prior CPA and ask. I personally don't think this is that big of a deal. It is either correct, or perhaps just an accounting mistake. Why make it into such a huge deal? You may have just freaked out the client for nothing.

Cpa2112010 (talk|edits) said:

23 November 2010
The other CPA who is in charge of this is adamant that the payment to shareholders should be cash basis. To review: Compensation of officer of closely held c corp in Q2 and Q3 with FY 12/1/09-11/30/10--W-2 issued, all employee/employer taxes paid in Q2 and Q3. Wages reported cash basis on 1040 for 2010. Company tax return filed for 2009 for year ended 11/30/10. Question: Does the W-2 have to match Corp? Do payments to shareholders have to be cash basis? Is it allowed to report the compensation to the officer in tax year 2009 or must it be reported in 2010?

If it's debatable I don't see why the client needs to come up with the extra tax owed because of losing the deduction for the compensation of the officer. The other CPA says go ahead and report it, but if you want the deduction on the corporate side, the owner employee will have to report it twice for 2010. He says the timing has been done in error in the past and skipping the deduction on the corporate side is the only way to "true it up". ???????

Trillium (talk|edits) said:

23 November 2010
Can you put some numbers to the situation; I'm not sure that everybody's talking about the same thing here.

For example:

  1. what was the amount for wages paid January through November, 2009?
  2. what were wages paid in December 2009?
  3. what will be the total for wages paid from January through November, 2010?
  4. what's the expected wage payment for December, 2010?

And then, to the extent you have this info, are these statements true? (a) the total of 1+2 = 2009 W-2, (b) the total of 2+3= fiscal year ending 11/30/10 business deduction, (c) the total of 3+4 = 2010 W-2.

Also, do you have a typo in your last post, in that the 2009 tax return would have been filed for the year ended 11/30/09 (not 2010)? (I don't have any FYEs, so this question may not be on-point). Removed once I refreshed my memory on FYE.

Cpa2112010 (talk|edits) said:

23 November 2010
1. 600,000

2. -0-

3. 600,000 -yes, the same as last year

4. -0-

[a] true

[b] fiscal 2010 business deduction will occur after year end 11/30/11

[c] true

No, it's not a typo. The year goes 12/1/09-11/30/10 and is filed 2009. At least I should say the year ending 11/30/2009 filed 2008 for the 1120.

Seaside CPA (talk|edits) said:

23 November 2010
In the above situation, $600,000 would be reported on the 2009 1040. $600,000 would be reported on the corporate tax return ending 11-30-10 (which would be on a 2009 1120 return). Not sure what your statement (b) is above.

Trillium (talk|edits) said:

23 November 2010
Ignore this post, please, if Szp's post answers your question. We were posting at same time.

Let me ask for a few additional numbers, then, now that I've refreshed my memory on "form years" -

  1. what was the amount for wages paid January through November, 2008?
  2. what were wages paid in December 2008?
  3. $600,000 was the amount for wages paid January through November, 2009
  4. $0 wages were paid in December 2009
  5. $600,000 will be the total for wages paid from January through November, 2010
  6. $0 is the expected wage payment for December, 2010?

Using the numbers from THIS list, to the extent you have this info, are these statements true? (a) the total of 1+2 = 2008 W-2, (b) the total of 2+3= fiscal year ending 11/30/09 (e.g., 2008 form year) business deduction, and (c) you already confirmed that the total of 3+4 = 2009 W-2.

And (d) will the total of 4+5= the fiscal year ending 11/30/10 (e.g., 2009 form year) business deduction?

Cpa2112010 (talk|edits) said:

23 November 2010
1. 600,000 --this is compensation of officer only-there were regular wages paid to the rest of the company as well all along 2007 was 400,000

2. -0-

3.true, 4.true, 5.true, 6.true

[a]600,000

[b]I think this is the heart of the issue. In rereading the posts, I think I answered this as 2008 before and I was wrong. This CPA [I am asking him to in effect prove his position which he will not do so I am trying to prove my position] I am working with says that the deduction for the corp was the next year, so it's sitting there ready to take for 2009 on the 1120 already. He maintains that shareholder payments are cash basis and this past practice by the former CPA is not ok, it's black and white, it's wrong. But it's been done this way for 31 years and my client says there wasn't a time where the owner got paid and the company didn't take the deduction so they want proof as to why they have to lose the deduction now.

[c]true

Thank you for the help!!

Cpa2112010 (talk|edits) said:

23 November 2010
So, if you were paid 100,000 in July, 2010, you would report it on the 2010 1040. And, you would take the deduction in FY 2009 since the year ends 11/30/10. The debate is whether they have to match the W-2 to the company deduction, right? Because if the other CPA wants them to do that, then the money paid in July, 2010 has to be reported on the 1120 12/1/10-11/30/11 to get it onto FY 2010.

Seaside CPA (talk|edits) said:

23 November 2010
You take the deduction in fiscal year (FY) ending 11-30-10, which is reported on the 2009 Corporate tax return form. As I stated above, the W-2's will not usually match the corporate deduction when a fiscal year is being used.

Seaside CPA (talk|edits) said:

23 November 2010
I think you are confusing "fiscal year" and "form year".
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