Question: S-Corp / K-1 strategies


S

SCorpGuy

I'm a 100% shareholder of an S-Corp, and the sole employee/officer.

Scenario: Say my company makes $100K in a year. Officer's compensation is
$90K, expenses $8K, so $2K remaining of the income for that year. At start
of year there was $3K in company checking account, so at end of year there
is $5K.

Now, $2K appears as ordinary income on 1120S line 21 and schedule K-1 box
1.
K-1 goes over to personal taxes (Schedule E), where I am taxed on it, even
though I have not received this $2K. If next year I decide to pay myself
this $2K, I am taxed a 2nd time.

Moral: use up every dollar of business income every year. Business bank
account balance at end of year should match amount at beginning of year.
Use up ALL income for the year. If any is left over, take the money (in my
example, $2K) as a distribution since you'll be taxed on it anyway. Adjust
K-1 to report this distribution in box 16 (as letter D).

Am I understanding this right? Please let me know if I'm missing anything.

Thanks in advance.
 
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P

Paul Thomas, CPA

SCorpGuy said:
I'm a 100% shareholder of an S-Corp, and the sole employee/officer.

Scenario: Say my company makes $100K in a year. Officer's compensation is
$90K, expenses $8K, so $2K remaining of the income for that year. At start
of year there was $3K in company checking account, so at end of year there
is $5K.

Now, $2K appears as ordinary income on 1120S line 21 and schedule K-1 box
1.
K-1 goes over to personal taxes (Schedule E), where I am taxed on it, even
though I have not received this $2K. If next year I decide to pay myself
this $2K, I am taxed a 2nd time.


Actually you aren't taxed - again - if you take it as a distribution of
profit.

Profit distributions from an S Corporation are not taxed as long as you have
basis.



Moral: use up every dollar of business income every year. Business bank
account balance at end of year should match amount at beginning of year.
Use up ALL income for the year. If any is left over, take the money (in my
example, $2K) as a distribution since you'll be taxed on it anyway. Adjust
K-1 to report this distribution in box 16 (as letter D).


Distributions are not taxed.

The income and profits are.



Am I understanding this right?


Not as right as you should.



Please let me know if I'm missing anything.


You're missing the fact that "S" profits are taxed - once - at the
shareholder level regardless of if those profits have been paid to the
shareholders. Often times the profits can't be paid out due to cash
restrictions.

Distributions from the "S" are not income to the shareholders as long as
they have basis.

Basis is the amount of money each shareholder puts into the business (the
cost of their stock, etc), plus profits and incomes, less losses, less
distributions.





Talk to your tax professional about all this.
 
K

Katie

I'm a 100% shareholder of an S-Corp, and the sole employee/officer.

Scenario: Say my company makes $100K in a year. Officer's compensation is
$90K, expenses $8K, so $2K remaining of the income for that year. At start
of year there was $3K in company checking account, so at end of year there
is $5K.

Now, $2K appears as ordinary income on 1120S line 21 and schedule K-1 box
1.
K-1 goes over to personal taxes (Schedule E), where I am taxed on it, even
though I have not received this $2K. If next year I decide to pay myself
this $2K, I am taxed a 2nd time.

Moral: use up every dollar of business income every year. Business bank
account balance at end of year should match amount at beginning of year.
Use up ALL income for the year. If any is left over, take the money (in my
example, $2K) as a distribution since you'll be taxed on it anyway. Adjust
K-1 to report this distribution in box 16 (as letter D).

Am I understanding this right? Please let me know if I'm missing anything.

You're missing the whole point of S corporations, as Paul has pointed
out. S corporation income is taxed once, at the stockholder level.
Not twice.

S corporations are complicated and not a do-it-yourself project unless
you have a strong tax background or are willing to do a lot of self-
education. You may be making other mistakes or missing other
opportunities. You need to consult a qualified tax professional.

Katie in San Diego
 
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B

Benjamin Yazersky CPA

I'm a 100% shareholder of an S-Corp, and the sole employee/officer.

Scenario: Say my company makes $100K in a year. Officer's compensation is
$90K, expenses $8K, so $2K remaining of the income for that year. At start
of year there was $3K in company checking account, so at end of year there
is $5K.

Now, $2K appears as ordinary income on 1120S line 21 and schedule K-1 box
1.
K-1 goes over to personal taxes (Schedule E), where I am taxed on it, even
though I have not received this $2K. If next year I decide to pay myself
this $2K, I am taxed a 2nd time.

Moral: use up every dollar of business income every year. Business bank
account balance at end of year should match amount at beginning of year.
Use up ALL income for the year. If any is left over, take the money (in my
example, $2K) as a distribution since you'll be taxed on it anyway. Adjust
K-1 to report this distribution in box 16 (as letter D).

Am I understanding this right? Please let me know if I'm missing anything.

Thanks in advance.

S corp income is only taxed once, unless it has C corp earnings and
profits (retained earnings).
Be careful about how your state deals with it.
State treatment doesn't always follow federal treatment.

You may want to consult your own CPA.



___________________________________
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