1120 FORM Schedule E - Compensation of Officers

[SJ]

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

 

[Wayne Brasch]

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

 

[FF]

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--

 

[Don Rosenberg, E.A.]

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.

 

[Michael T Wing CPA]

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

 

[Charles Markham, EA]

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

 

[Ed Zollars, CPA]

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.

 

[FF]

... 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