1120 FORM Schedule E - Compensation of Officers

Discussion in 'Tax' started by SJ, Oct 17, 2003.

  1. SJ

    SJ Guest

    I've been running a one-person corporation for 20 years and
    my accountant always has filled in Schedule E Compensation
    of Officers even though the company's total receipts are way
    below the $500,000 the IRS says to use for Schedule E. He
    always lists my salary on line 12 of 1120 (corresponding entry
    in Schedule E) instead of using line 13 of 1120 for salaries
    and wages.

    What is the reasoning behind doing it this way? The salary
    comes off as a deduction either way so I don't get it (my
    accountant is off in the Bahamas right now spending my money
    no doubt so I can't ask him).

    Thanks.
    sj

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    SJ, Oct 17, 2003
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  2. SJ

    Wayne Brasch Guest

    "SJ" <> wrote:

    > I've been running a one-person corporation for 20 years and
    > my accountant always has filled in Schedule E Compensation
    > of Officers even though the company's total receipts are way
    > below the $500,000 the IRS says to use for Schedule E. He
    > always lists my salary on line 12 of 1120 (corresponding entry
    > in Schedule E) instead of using line 13 of 1120 for salaries
    > and wages.
    >
    > What is the reasoning behind doing it this way? The salary
    > comes off as a deduction either way so I don't get it (my
    > accountant is off in the Bahamas right now spending my money
    > no doubt so I can't ask him).
    >
    > Thanks.
    > sj



    Possibly your accountant's software does not take this
    requirement into account. You need to remember that in some
    cases programmers of tax software don't know the tax laws
    nor do they bother to read the forms to see what is required
    and what is not. Ask your accountant when he returns from
    the Bahamas and I think this is what you'll find. It depends
    on the tax software he chose to use to prepare your tax
    return.

    Wayne Brasch, CPA, M. S. Taxation

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    Wayne Brasch, Oct 18, 2003
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  3. SJ

    FF Guest

    "SJ" <> wrote:

    > I've been running a one-person corporation for 20 years and
    > my accountant always has filled in Schedule E Compensation
    > of Officers even though the company's total receipts are way
    > below the $500,000 the IRS says to use for Schedule E. He
    > always lists my salary on line 12 of 1120 (corresponding entry
    > in Schedule E) instead of using line 13 of 1120 for salaries
    > and wages.
    >
    > What is the reasoning behind doing it this way? The salary
    > comes off as a deduction either way so I don't get it (my
    > accountant is off in the Bahamas right now spending my money
    > no doubt so I can't ask him).


    Your accountant may be unaware of the revision to Form 1120
    Instructions, or maybe his return-prep software doesn't
    suppress Schedule E entries in your case. However, it is
    not good to bury Officer Comp in Salaries and Wages on the
    front of the return. It will look bad in the event of an
    audit, raising suspicion as to why the preparer is hiding a
    deduction which can be an issue as to reasonable comp to an
    officer, followed by detailed search for any other
    misclassification. In fact, theoretically it's a crime,
    verses practically as to what a jury will need to hear. But
    the law is that any falsification of a material fact on a
    tax return does not require the gov't to prove the dollar
    amount of harm, only intentional frustration of its ability
    to enforce tax laws.

    F--

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    FF, Oct 18, 2003
    #3
  4. "SJ" <> wrote:

    > I've been running a one-person corporation for 20 years and
    > my accountant always has filled in Schedule E Compensation
    > of Officers even though the company's total receipts are way
    > below the $500,000 the IRS says to use for Schedule E. He
    > always lists my salary on line 12 of 1120 (corresponding entry
    > in Schedule E) instead of using line 13 of 1120 for salaries
    > and wages.
    >
    > What is the reasoning behind doing it this way? The salary
    > comes off as a deduction either way so I don't get it (my
    > accountant is off in the Bahamas right now spending my money
    > no doubt so I can't ask him).


    The IRS is looking for indications of unreasonable
    compensation to officers. If a C Corp. pays its officers an
    unreasonably high salary, it reduces the amount of profit to
    be distributed as dividends, and thereby reduces the
    double-taxation effect that the IRS dearly loves.

    With an S Corp., the opposite is true. If an S Corp. does
    not pay an officer at least a reasonable salary, then
    FICA/Medicare taxes are being avoided.

    When the IRS deems that improper salaries are being paid to
    officers, it has the authority to reclassify wages. In the
    case of a C Corp., the excessive amount can be reclassified
    as dividends. In the case of an S Corp., distributions in
    lieu of salary can be reclassied as wages.

    Don Rosenberg, E.A.

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    Don Rosenberg, E.A., Oct 18, 2003
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  5. SJ <> wrote:

    > What is the reasoning behind doing it this way? The salary
    > comes off as a deduction either way so I don't get it (my
    > accountant is off in the Bahamas right now spending my money
    > no doubt so I can't ask him).


    As others have mentioned, this may have to do with the
    flexibility of the software being used.

    But, here's my feeling on the topic: Just because the form
    instructions state that you can omit certain information
    under certain circumstances does NOT mean that the IRS can't
    "demand" it upon audit. It is invariably easier to assemble
    this information while it is freshly available (ie: when the
    return is being prepared) than a couple of years later when
    the auditor shows up. Hence, I normally complete ALL the
    schedules on Form 1120 regardless of dollar thresholds.

    In any event, putting the officer's salary on the non-officer
    wage line is just plain "wrong." It smacks of deceit.

    Permit me to ask: How or why do you feel "prejudiced" by this
    issue?

    MTW

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    Michael T Wing CPA, Oct 20, 2003
    #5
  6. > Hence, I normally complete ALL the
    > schedules on Form 1120 regardless of dollar thresholds.


    Agreed! Filling out this schedules are nice "work papers"
    to help make sure that everything ties.

    In fact, an IRS examiner once told me that while
    he wasn't sure which corps were selected for audit, ALL of his
    corps had "clean schedules" and chose to withhold all info
    whenever possible. He drew the conclusion that an M-1
    without any adjustments was sure audit bait.

    Charles Markham, EA

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    Charles Markham, EA, Oct 22, 2003
    #6
  7. SJ wrote:

    > He
    > always lists my salary on line 12 of 1120 (corresponding entry
    > in Schedule E) instead of using line 13 of 1120 for salaries
    > and wages.


    Well, the instructions for Form 1120, while allowing you not
    to fill in Schedule E, do *NOT* say that officer salaries
    are not reported on line 12. Rather, the instructions
    clearly state right up front that deductible officer
    compensation must be reported on line 12--and then go to
    state that if total receipts are more than $500,000, *then*
    Schedule E must be filled in.

    Basically, that means you use line 12 no matter what, but
    can *optionally* omit the detailed entries of Schedule E if
    you wish so long as gross receipts are less than $500,000.

    As for why your accountant fills in Schedule E anyway--I
    suspect it may be a cost/benefit issue. The accountant
    could check every single return and omit Schedule E for each
    one that had less than $500K in gross receipts, and charge
    accordingly for doing that work. Or, in the alternative, the
    accountant could simply allow the software to flow the
    information through (likely proforma'd from year to year
    except for the amount) without regard to that issue. From
    the standpoint of work being done, it's actually more work
    to "save" filling out that schedule.

    As Michael and others have noted, the issue of officer
    compensation can be touchy with the IRS. If your return is
    "kicked out" for examination based on officer compensation,
    a live person would look at your return. If the detail of
    compensation is not on Schedule E, the person making the
    decision will know the only way to find out what makes up
    that number is to let the return be examined and the person
    may assume a "bad" answer is possible. And, as long as
    we're going to examine the return, the IRS might want to
    pick up a couple of other items <grin>.

    If the information is disclosed, then the answer is there
    without an exam being required. Now if the answer is bad,
    an exam might take place anyway--but since I doubt the IRS
    will assume a "good" answer I doubt there would be many real
    cases where having filled in Schedule E would cause an exam
    that otherwise wouldn't take place. Even worse--if the
    accountant omits it and then you happen to go over $500,000
    there's a risk that Schedule E won't be filled out when the
    instructions say to do so--and then your return could look
    suspicious.

    --
    Ed Zollars, CPA
    Phoenix, Arizona

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    Ed Zollars, CPA, Oct 22, 2003
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  8. SJ

    FF Guest

    "Ed Zollars, CPA" <> wrote:

    > ... From
    > the standpoint of work being done, it's actually more work
    > to "save" filling out that schedule.
    >
    > ... If the detail of
    > compensation is not on Schedule E, the person making the
    > decision will know the only way to find out what makes up
    > that number is to let the return be examined....


    Another good example is the new relief from filing a balance
    sheet and Sch M for a small S-Corp. Where there's a loss,
    and no balance sheet per return, the same IRS agent can see
    the need to examine a loss return and roll the dice the t/p
    does not have balance sheet accounts per general ledger, or
    at least balance sheet per columnar worksheets, to provide
    shareholder basis to claim the loss. Or if the loss isn't
    too big, the trouble/cost to reconstruct the necessary stuff
    isn't worth it against the tax deficiency even where
    everything else checks out!

    Fred

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    FF, Oct 24, 2003
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