Discussion:Shareholder Distribution Tax Rate?
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| Revision as of 15:09, 26 August 2006 JR1 (Talk | contribs) (Thanks, Natalie,) ← Previous diff |
Revision as of 20:03, 26 August 2006 Jc (Talk | contribs) (Side note: Sure) Next diff → |
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| {{ForumReplyPost|UserID=JR1|Date=August 26, 2006|Text=Thanks, Natalie, but I guess we assumed he meant the profit distribution that flows from the K1...tho' you never know.}} | {{ForumReplyPost|UserID=JR1|Date=August 26, 2006|Text=Thanks, Natalie, but I guess we assumed he meant the profit distribution that flows from the K1...tho' you never know.}} | ||
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| + | {{ForumReplyPost|UserID=Jc|Date=26 August 2006|Text=Side note: | ||
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| + | Sure that's a ton of cash, but before you all give your 2 weeks notice, I should point out that his business is actually illegitimate. This kind of thing made tech news a few months back, since to create an account for this type of online game you have to agree to terms and conditions, the most prominent of which is that you may not sell virtual currency for hard currency. It was smart for this chap to incorporate purely for liability reasons, forget that he's not saving any tax money since he's maxing out his SS wage base. If whoever runs this particular game decides to bring suit, it will be nice for him to at least be able to attempt to protect his personal assets behind the corp, though from what I've read, it's unlikely that the protection will really hold up considering the owner and only shareholder of the business was willfully violating a legal agreement for profit. I mean, it's not like he's trying to hide it or anything :)}} | ||
Revision as of 20:03, 26 August 2006
Discussion Forum Index --> Tax Questions --> Shareholder Distribution Tax Rate?
| 25 August 2006 | |
| Beginning in February, my S-Corporation began paying me a salary of $10k per month. So, at the end of the year, I'll have $110k in wages. I also will have a minimum of $200k in shareholder distrobutions. My question is, does the distrubtion affect my marginal tax rate? Or more to the point, at what rate will my distrobutions be taxed? | |
| August 25, 2006 | |
| Ordinary income, just like the wages. But not subject to SS taxes...that's the difference. | |
| 25 August 2006 | |
| So the tax would be calculated exactly the same as if I had received the full amount in wages, except there's no FICA on the portion that was received as a distribution? So my marginal tax rate will end up being 33% or 35%? Man, my CPA really misled me, or I seriously misunderstood :( | |
| August 25, 2006 | |
| You've got it right. Sorry about the misunderstanding. The big advantage of the S Corp is if your reasonable salary is lower than the SS ceiling, which is over 90k this year. Run to www.salary.com and take a look. You can, for free, get a report that shows your salary range for your area. Read the job descriptions carefully, and pick the one that best describes what you do, apart from being the owner. Maybe your salary can be lowered a bit to better take advantage. Otherwise, there's nothing else that would have been better anyway. In an LLC, the same rules apply. As a sole prop, all would been subject to PR tax anyway. And don't forget you can set up some retirement based only your salary, not the distributions. | |
| 25 August 2006 | |
| <Man, my CPA really misled me, or I seriously misunderstood :(>
This is fairly basic stuff. I doubt the CPA misled you. What was your understanding of the concept? Or your target for the tax rate? Can you set up some sort of 401k plan to reduce the taxable income? That could get you about $40,000 of income sheltered for now. | |
| 25 August 2006 | |
| <I also will have a minimum of $200k in shareholder distrobutions.>
Whats the nature of these distributions? Capital gains? Sale of assets? Or just distribution of business profits? That could change the answers some. | |
| 25 August 2006 | |
| Shareholder distributions are taxable as capital gains if the distribution exceeds your stock basis . The gain is reported on Schedule D of your 1040. It is considered a sale or exchange of property. JR1, where did you get the ordinary income from? | |
| August 25, 2006 | |
| It's going to roll from line 1 off that K1 generally. It's ordinary income, goes on p2 of Sch. E, and then to page 1 of the 1040. You might hope for something else, but it's ordinary unless, as Gosix pointed out, you sold something and had some gains flowing thru. Sorry, RFB, but your scenario only applies if you're selling the stock. That income creates basis as well. | |
| 25 August 2006 | |
| I agree with JR1 I had the same senario in 2005 . If we are talking of an S-corp without any sell of any sort of stocks or assets it's treated as ordinary income . | |
| 25 August 2006 | |
| Maybe I am not understanding Tjstewart's question. He said a distribution, not net profit of the S Corp. So, are we talking about the net profit, which of course is taxable as ordinary income not subject to SE, or are we talking about a cash distribution of money in the corporation. Since profits have been taxed...just like you described JR1, then you can take a tax free (not really because you have paid tax on the profits) distribution of your equity. Keep an eye on your basis. That amount goes in box 16 code D of the K-1.
The reasonable comp issue is always there. Must take that salary, and if it is reasonable, then you can take more money as a distribution which is an equity reduction not a corporate expense or taxable income, unless you exceed your stock basis. Hope that is more clear. | |
| 25 August 2006 | |
| Well, here's the gist. I sell virtual currency in a game called EverQuest. Despite the large numbers, it requires very little effort and very little time spent. I don't actually "do" a whole heck of a lot outside of maintaining Quickbooks and sending off tax forms and my withholding, and distributing a bit of 1099 income to the people that actually do what little work there is to do. That's really my entire role. The company received no initial investments from anybody and I only created it to pass a bunch of dollars through and save on taxes. Unfortunately, I was not well-informed (my own fault, of course) when I set things up and it hasn't done much to help me. Perhaps you guys can offer some suggestions? | |
| August 25, 2006 | |
| I'll really stand my advice then, to determine reasonable salary! If you're not devoting much time to this...then there's no reason to be hauling a 120k salary by any means. There are opportunities here for you...get to salary.com and explore, even tho' your job is going to be tough to find...if you've got any comparable info from a trade assoc. or something, that would be even better, perhaps. | |
| 25 August 2006 | |
| what effect does it have even if the distributions were from capital gains (sale of assets) versus ordinary income. the capital gains just goes on schedule d either line lines 5 or 12 depending on long term versus short term, which just gets lumped together with their other personal capital gains, in turn goes on page 1 line 13 of the 1040 and is lumped together in the agi. | |
| August 25, 2006 | |
| Well, it has two huge impacts. First, and most importantly, is paying taxes at all! No one wants to pay sooner that necessary. So, let's assume for a moment that there is a distribution in excess of basis, and it's taken to income, taxes are paid, etc. Next year, income is higher, in effect repaying that excess distribution. Gonna get that money back? Nope. It's gone. Sure, you get to adjust basis and all, but I've not met anyone who wouldn't rather have the cash. So, in my mind, until I can determine that that excess distribution will not or cannot be repaid, it should be a loan.
As to the second, the rules require that if there is a note document for the excess, it will be treated as cap gain, 15% plus state tax. If no note, ordinary income, 28+% plus state. Big diff. | |
| 25 August 2006 | |
| I have another question. Next week, I am moving from MO to FL. How will it be determined which portion of the profit distributions will be taxed by MO and which won't be taxed at all (since FL has no state income tax)? | |
| August 25, 2006 | |
| Your move date. The first eight months in MO and the last 4 in FL, based on profit at 8/31 would be my choice. Maybe someone will write in that you could allocate based on year end, or pick the best answer. . . | |
| 25 August 2006 | |
| <I sell virtual currency in a game called EverQuest. Despite the large numbers, it requires very little effort and very little time spent. >
Ok, the heck with this tax advice stuff. How about you tell us some more about the business! | |
| 25 August 2006 | |
| http://news.com.com/2100-1040-823260.html
Everquest currency search BTW I never cease to be amazed! | |
| 26 August 2006 | |
| Since I'm on a roll here with all of these questions, I suppose I'll ask another one. When I move, can my business pay for the new furniture for my new home office? | |
| 26 August 2006 | |
| Yes.
Just make sure its Office. And spend some of those profits on a good accountant to set you up right and minimize the tax bite as much as possible. | |
| August 26, 2006 | |
| Just for clarification purposes -- distributions are not taxable, unless they are in excess of basis. What IS taxable, is the net that flows through from the Schedule K to the 1040. So, in answer to the first question posed, I would say 0%.
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| August 26, 2006 | |
| Thanks, Natalie, but I guess we assumed he meant the profit distribution that flows from the K1...tho' you never know. | |
| 26 August 2006 | |
| Side note:
Sure that's a ton of cash, but before you all give your 2 weeks notice, I should point out that his business is actually illegitimate. This kind of thing made tech news a few months back, since to create an account for this type of online game you have to agree to terms and conditions, the most prominent of which is that you may not sell virtual currency for hard currency. It was smart for this chap to incorporate purely for liability reasons, forget that he's not saving any tax money since he's maxing out his SS wage base. If whoever runs this particular game decides to bring suit, it will be nice for him to at least be able to attempt to protect his personal assets behind the corp, though from what I've read, it's unlikely that the protection will really hold up considering the owner and only shareholder of the business was willfully violating a legal agreement for profit. I mean, it's not like he's trying to hide it or anything :) | |
