USA Single member S Corp taxation - flow of income, does this look right?

[nooblet]

I am reviewing last year S-Corp tax return of a client to prepare for this year return. This is a single member S-Corp, taxpayer own 100% of stock. Does this look right to you?

the owner was not on payroll of this S-Corp, this business is in servicing industry, thus, no 1125A needed

Questionable items are listed below

1120S gross income ---------------- 800k
deduction on supplies -------------- 300k

on 1120S line 14 Depreciation ----------------------- $0

on 1120S line 7 Compensation of officers -------- $20,000
this 20,000 flowed to 1040 personal tax line 17 Rental real estate,royalties,partnerships,S corporations,trusts, etc ---- 20,000

on 1120S line 21 Ordinary business income ----------- $20861
this $20861 could not be found on 1040 personal tax return

1120S schedule L balance sheet
Cash ------------- Beginning balance $18000 Ending balance $ 15000
Loan from shareholders ------------- Beginning balance $20000 Ending balance $20861
Retained earnings -------------------- Beginning balance $ -2000 Ending balance $ -5861

Does this look right? It appears whoever prepared this return had no idea was going on and just fudge the number to make it work.

I have reasonable of tax knowledge but I do not have a lot of experience preparing Corporation tax returns. It seems like at least some depreciable assets were 100% deducted as supplies. Income on personal tax return was understated for $20861, and numbers were pulled from thin air to make 1120S schedule L balance.... Could someone confirm this?

 

[brian duddy]

I am reviewing last year S-Corp tax return of a client to prepare for this year return. This is a single member S-Corp, taxpayer own 100% of stock. Does this look right to you?

the owner was not on payroll of this S-Corp, this business is in servicing industry, thus, no 1125A needed

Questionable items are listed below

1120S gross income ---------------- 800k
deduction on supplies -------------- 300k

on 1120S line 14 Depreciation ----------------------- $0

on 1120S line 7 Compensation of officers -------- $20,000
this 20,000 flowed to 1040 personal tax line 17 Rental real estate,royalties,partnerships,S corporations,trusts, etc ---- 20,000

on 1120S line 21 Ordinary business income ----------- $20861
this $20861 could not be found on 1040 personal tax return

1120S schedule L balance sheet
Cash ------------- Beginning balance $18000 Ending balance $ 15000
Loan from shareholders ------------- Beginning balance $20000 Ending balance $20861
Retained earnings -------------------- Beginning balance $ -2000 Ending balance $ -5861

Does this look right? It appears whoever prepared this return had no idea was going on and just fudge the number to make it work.

I have reasonable of tax knowledge but I do not have a lot of experience preparing Corporation tax returns. It seems like at least some depreciable assets were 100% deducted as supplies. Income on personal tax return was understated for $20861, and numbers were pulled from thin air to make 1120S schedule L balance.... Could someone confirm this?

i was scrolling down the page on here when i saw your post about the tax issue , text me on (323) 553-2418 to discuss more on it ok?

 

[Tyson]

I am not very experienced with this sort of thing, but I already see lots of problems.

This "deduction on supplies", is this for COGS? Line 2? If so the 1125-A form is required. Service industries can also have COGS accounts. Or are the supplies a line 19 item? I don't know what the "supplies" are, so I don't which section they should go in. If the supplies are $300,000 on $800,000 of gross sales, then there should likely be an inventories balance and a COGS expense.

Line 7, compensation of officers. You said he was not on payroll. This line is for payroll. It looks like perhaps he took this amount as non-dividend distributions. Or perhaps this amount was to pay off the $20,000 loan? Before the corporation can pay non-dividend distributions, all shareholder-employees need to be paid a reasonable salary through payroll. Otherwise he is violating tax law. What is reasonable depends on the employee's position and industry standards. By not being on payroll, he is also violating labor laws by not paying himself the minimum wage. If he was paying off the loan then it's a different matter. Either way this $20,000 doesn't belong here.

For the retained earnings account to be negative with a business income of $20861 means that either there was a very high amount of non-deductible business expenses, or many non-dividend distributions. Or a combination of both. Also it's quite strange that loans from shareholders equals business income.

What I think is going on here is that he is taking the business income at the end of the year out as a non-dividend distribution and loaning it back to the company. Then the following year he has the corporation pay off its loan. There's nothing wrong with doing this, but there are a few problems in the way he is doing it. The amount passed through to his personal taxes that he needs to pay federal taxes on is the amount at the end of the year. In this case the $20,861. Not the $20,000 of loans that the corporation repaid.

The second problem is what I mentioned earlier. He needs to be paid a reasonable salary. His corporation is not profitable enough to be making any non-dividend distributions. The amounts that are being distributed should be paid out through payroll instead. The IRS will catch on quick and send an auditor.

The third problem is that loans made to the corporation need to have interest charged at at least the IRS's applicable federal rate. I think he would be better off not making the loans in the first place. There's no point to it.