USA S corp distributions

[ionltd]

Is it ok for a single share holder of an S corp to pay themselves $22,000 in payroll taxable income and take $100,000 in distributions?

Would this be entered on either the corporate or individual tax return? If so, where?

How and when is it OK for a single shareholder of an S corp to pay a majority of their living expenses, including gifts, family meals, a swimming pool, family cars and all household monthly bills from this S corp account?

I know it sounds nuts, but please let me know

Thanks

 

[Ugo]

Let me try to tackle this one by one.

Is it ok for a single share holder of an S corp to pay themselves $22,000 in payroll taxable income and take $100,000 in distributions?

Yes. Since an S corp is a flow through entity, at tax filing, all net profits flow through to him on his personal taxes. So as long as all that is done properly, he or she can give themselves whatever dividends they want to whenever.

Would this be entered on either the corporate or individual tax return? If so, where?

The distributions are not subject to additional taxes if he or she has filed and paid whatever taxes are due

How and when is it OK for a single shareholder of an S corp to pay a majority of their living expenses, including gifts, family meals, a swimming pool, family cars and all household monthly bills from this S corp account?

Now that part is not appropriate. However many business owners in that position do it. If he pays for those expenses via distribution and dividends, then it isn't a problem. But if they are expensed in the company's books, then that could be a problem during an audit.

Also, it could be a problem in the case of litigation. It is called "piercing the corporate veil". If the company were sued, the litigator could theoretically come after his private property as well.

Please not, this does not constitute legal advice. Take it for what it is worth.

 

[ionltd]

Wow, so it is OK to not pay taxes on $100,000 income for either the corporation or the individual. Who knew. And you don't even have to report the income....wow. No wonder Democrats and Libertarians get pissed about corporations.

No all those items were paid directly by the corporation with a corporate check.

 

[Ugo]

Let me clarify...

At the end of the year, when the S Corp files taxes, the total net income flows through to the single owner on his taxes and he has to pay the taxes. So yes, they both pay. It is just treated differently. Often times, the owner will take a distribution to pay the taxes.

Does that make more sense?

Example. Ben is the 100% owner of S Corp. S Corp makes $100 net profit at the end of 2015. Ben's income (assuming he has no other source of income) is $100 and he has to pay the taxes even if he take $0 distribution.

Say the tax is $20...Ben could tell the company to write him a check for said $20...then use to money to pay the tax. There won't be any additional tax on the $20 he's having the company write.

 

[ionltd]

There is no waiting to see if there is a profit to write distribution checks. Each month a payroll check for appox $1800 is written to Mr X the s corp 100% owner, then the same day he writes himself varying amounts of $2000-$4500. And other times of the month he writes himself checks for cash in the amount of $1000-$3000. He also writes other checks and deposits them into a separate "household" checking account for $1000-$3000. I don't see that money accounted for on either the corporate or individual tax.

 

[ionltd]

Just looked at the corporate return again....it showed a loss

 

[DTA93433]

An important consideration here that hasn't been mentioned yet is the "reasonable salary" issue. The IRS requires a "reasonable salary" to be paid to an s-corp shareholder/employee. See https://www.irs.gov/businesses/smal...ion-compensation-and-medical-insurance-issues. Strictly going by the numbers given, $22k of salary (in relation to $100k taken in distributions) seems a rather low ball-park. The IRS could potentially come back and want to reclass some of the $100k as "salary".

 

[ionltd]

Thanks for your response. I knew that, and I'm pretty sure that will eventually come into play in this fiasco when the IRS gets wind of it.

Right now paying every single personal expense from the corporate account by directly funding of the personal checking account from corporate funds, paying the personal credit card with corporate funds, paying personal bills from the corporate account and credit card, etc, seems to be the big issue. Not paying income tax on all that will come to light before the $100,000 in cash and checks he's taken as "distributions".

 

[DTA93433]

The other problem the taxpayer could also have (in addition to having dividend's reclassified as W-2 income, plus penalties, and interest), is potentially having years of returns audited with a fine tooth comb. If the IRS finds that the s-corp has been paying "personal expenses" - even though they may be classified on the books/K-1 as "distributions", they'd probably want to go thru every single entry. It's not a problem (per se) for the S-corp to pay personal expenses of the owner, but it should pay the owner directly, as opposed to making a payment to each/every vendor. As was mentioned before, this is also why it's imperative to maintain the s-corp stock (and debt) basis for each s-corp shareholder/employee. Distributions in excess of stock basis should be treated as a either a short-term (or long-term) capital gains.

Lastly, resist the urge to classify distributions as "loans to shareholders"; if they aren't. There are strict rules regarding s-corp loans.

 

[ionltd]

Thanks

It's my soon to be ex's problem