IRS wrote:
- quote -

Geesh, I'm tempted to say "Shame on you", for saying
something like that.

Don't know what your qualifications are , but just replying
as "IRS" won't hack it.

The real IRS would NOT expect a corporation with a loss to
pay it's sole shareholder a salary, reasonable or otherwise.

Cheer$,
Harlan Lunsford, EA in LA

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"Brian Corll" <bcorll[at]bellatlantic.net> wrote:
- quote -

You will go to jail.

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"Brian Corll" <bcorll[at]bellatlantic.net> wrote:
- quote -

I grasp your situation and I understand your point. However,
almost everything comes down to a matter of facts and
circumstances and at that level you really need a tax pro
who understands your facts and circumstances. My best advice
to you is "Run, Don't Walk" to a local tax pro and explain
all this to her/him.

Dick

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"ge"<e_c_c_l_e_s[at]a-znet.com> wrote:
- quote -

Then the S-corp is not operating a trade or business and
there is no activity for which a salary should be paid for.
Same as if it were only holding investments.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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j.green[at]worldnet.att.net (Christopher Green) wrote:
- quote -

Suppose there is only _very_ minimal work actually being performed?

For instance, suppose the S-corp developed a product, which it then
licensed to another compnay, and now the only activity of the S-corp
is to distribute royalty payments.

TIA,
George

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- quote -

I agree, I know many small business owners that started out
paying themselves very little but the business makes a
profit, the situation sounds reasonable and is not "audit
fodder"

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"Harlan Lunsford" <hlunsford[at]bellsouth.net> wrote:
- quote -

What if I had paid myself a reasonable salary in the past
year and also received a K-1 distribution at the end of the
year due to profits ? Currently I'm in an occupational
transition stage and not billing anyone. I have had modest
income from existing clients who are being phased out, but
my expenses this year will exceed my income. Is there still
a problem ? Can I just live off the distribution from last
year (plus additional savings), and not issue a paycheck to
myself without causing trouble ? It seems to me I should be
able to do this - I can't think of a reason why not.

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"Harlan Lunsford" <hlunsford[at]bellsouth.net> wrote:
- quote -

No, even if I do not pay myself a salary, the corporation
will NOT have a profit after all expenses are accounted for.
Last year I paid myself a reasonable salary and received a
K-1 distribution of profit. I banked that profit. I can
now do whatever I want with that distribution (profit) from
last year, i.e. use it to pay living expenses, without a
problem, correct ?

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"Dave Woods, EA" <d.woods[at]verizon.net> wrote:
- quote -

That is not a fair analysis! Many owners of small business,
especially during the start up phase, are willing to work
for less than market salary for a variety of reasons, many
of which are perfectly legitimate. Most of us who have
started our own business have had to work for substantially
less in the early years in order to build the business to
the point where it was able to pay a salary to the owner -
there is nothing wrong, immoral, illegal, or unusual about
this.

Under your theory if a new business isn't able to pay
everyone who works there a market rate salary they would not
be allowed to go into business. And what about the company
that experiences cash flow problems and renegotiates lower
salaries for workers rather than close altogether and put
the employees out of work completely.

Every small business owner I know, my clients, my friends,
and myself included is the LAST one to get paid. The sick
part is while I could likley make more money working less
for someone else, I wouldn't trade owing my practice for 10
times our gross revenue!

Gene E. Utterback, EA

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Bill Bourbonnais, EA wrote:

- quote -

If you look at the case law in this area and the underlying
IRC on payroll taxes, you'll find that generally you are
going to need *distributions* to allow the IRS to impute
salary. In the case you mentioned, if there's simply no
cash available to pay salary and none is actually
distributed, then the IRS would have a difficult time coming
up with a non-frivolous theory that would create salary.

Now, if you have significant income in the future, I *could*
see the IRS arguing for a "more than adequate" salary for
the year under the "deferred compensation" theory
<grin> --but, again, from a practical standpoint it would be
more difficult to carry *AND* they aren't likely interested
if the taxpayer has already cleared the FICA limit and all
we are talking about is Medicare tax.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Bill Bourbonnais, EA" <bill[at]libertytaxnospamnovisalia.com> wrote:

- quote -

I have had start-up S-Corps in which the officers drew no
salary and have not had a problem. The circumstances were
such that there was little or no profit and no shareholder
distributions. In some cases there were substantial
contributions to capital or large loans from shareholders.
The situation is usually reasonably clear on Sch L. If the
Corp needs to retain profits for a while in order to
accommodate anticipated future costs, I would ensure that
such needs are fully documented in the Corporate Minutes.

Don Rosenberg, EA

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"Bill Bourbonnais, EA" <bill[at]libertytaxnospamnovisalia.com> wrote:
- quote -

Iinteresting situation! I would say from a technical
standpoint this would still be a problem. However, from a
practical standpoint, if the S corp really is distrubuting a
small sum - less than $1,000 - I doubt that you'd get into
too much real trouble over it. It is hardly worth the IRS's
time and effort to come after you for $1,000.

On the third hand however, I would question why a
corporation that is trying to maximize cash flow during the
start up phase would make a profit distribution if the
profit was so small that the owner/shareholder was not able
to take a salary.

Performing stockholder's salaries do come into play
regarding the pass through of IRC Sec. 179 amounts when the
business posts an ordinary loss, so you do have to watch for
that.

Gene E. Utterback, EA

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Don Rosenberg wrote:
- quote -

Well, all is not lost. It's still early in the year. If
the sole shareholder forsees a profit, he still has time to
formally pay himself a reasonable salary between Sep 1 and
Dec 31. The rest are properly dividends and reflected on
the bottom line.

Cheer$,
Harlan Lunsford, EA in LA

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Brian Corll wrote:

- quote -

One question please. If you do NOT pay yourself a salary,
will the corporation have a profit? If so, you should take
a reasonable salary; if not, no problem.

Cheer$,
Harlan Lunsford, EA in LA

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"Don Rosenberg" <taxoffice[at]rosieea.gccoxmail.com> wrote:
- quote -

To elaborate on all of the responses to date, all of which I
agree with -keep in mind that once you started taking a
salary some six years ago, you established what a reasonable
salary was. Consequently, if times have hardened up a bit
it is going to be very hard to argue that you can't afford a
salary but can afford to distribute profits. More likley,
the IRS will expect you first stop the distrubtions of
profit BEFORE you even think about reducing your salary.

Gene E. Utterback, EA

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Don Rosenberg wrote...
- quote -

How about a situation where the S-Corp is a start-up and
doesn't have sufficient cash flow yet to pay the shareholder
officer (shareholder officer is performing all senior
management tasks; however, there are other employees on
payroll for day-to-day tasks.) S-Corp is projected to show
a loss and/or very minimal profit (less than $1000) the
first 2 - 3 years until cash flow can support an officer's
salary. Would this exempt the shareholder officer from
drawing a salary, or should a reasonable salary be
established and either deferred as an accrued salary payable
or paid in corporate stock? Is there any impact on the
pass-through profit or loss? Shareholder is not trying to
avoid reasonable salary and payroll taxes; simply trying to
maximize cash flow during the start-up phase.

Bill Bourbonnais

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"Brian Corll" <bcorll[at]bellatlantic.net> wrote:

- quote -

S-Corps which do not pay shareholder officers a reasonable
salary are audit fodder. I believe you are indeed looking
for trouble, as the IRS views such practice as an attempt to
avoid payroll taxes. Your distributions could be
reclassified as wages and back taxes plus penalties &
interest would be due.

Don Rosenberg, EA

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- quote -

If you take distributions, you must also take "reasonable" wages.

--
Robert J. Romano, CPA
99 Massachusetts Avenue-Suite 4
Arlington, Massachusetts 02474-8600
Tel. 781-648-4966
Fax 781-240-7799
www.romanocpa.com

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"Brian Corll" <bcorll[at]bellatlantic.net> wrote:

- quote -

You're looking for trouble.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.

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I am a self-employed consultant and I have been an S corp
for six years. I have paid myself a bi-weekly paycheck for
most of that time, until the economic downturn hit me and I
stopped issuing regular paychecks to myself. My question is
- is there any problem just paying myself the distribution
that I report on my K-1 and skip the paycheck and the 941
payments, or am I looking for trouble here ?

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