On Jun 10, 11:56*am, Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

snip
- quote -


Well, this is the difference between THEN and NOW. THEN we were
worried about EXCESSIVE compensation paid by C corporations. NOW we
are worried about INSUFFICIENT compensation paid by S corporations.

It's also the difference between C and S. To the extent that a C
corporation treats amounts paid to its stockholder/employees as wages,
the corporation gets a deduction. If the compensation is deemed
excessive, part of it may be reclassified as a dividend. Makes no
difference to the individual, but the corporation gets no deduction
for the dividend. So the $100K would have been assessed at the
corporate level.

S corporation planning goes the other way. If cash withdrawn is
treated as wages, it is subject to Social Security and Medicare taxes,
and the corporation must pay for workers' compensation and
unemployment insurance. If it's a distribution of income on which the
stockholder/employee already has or will have paid income tax, the
payroll taxes don't apply. So in the S corporation case the IRS is
looking to reclassify distributions as wages, rather than the other
way around.

Katie in San Diego

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Katie <katiej_1958[at]yahoo.com> wrote:
- quote -

I once had a client who took home more than $400,000 from his company
in one year, and the IRS wanted to impose an additional tax of
$100,000 as a result of a deemed dividend. I was able to show that
he built the business up from almost nothing, that in prior years he
had taken a very low salary, and that the additional amount that year
was in the nature of a bonus for the sacrifices he had made in prior
years.

The IRS (eventually) backed off completely and didn't get a single
dollar.

Stu

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On Jun 10, 8:26*am, "removeps-gro...[at]yahoo.com" <removeps-
gro...[at]yahoo.com> wrote:
- quote -


With great difficulty <G> .

Actually this is one of those somewhat amorphous, subjective, "facts
and circumstances" things. As Stu suggests, comparables in the
corporation's industry are an important benchmark. What would I have
to pay an employee with qualifications similar to mine to do what I
do? What could I earn as salary if I did it as someone else's
employee? How does the corporation earn its income -- is it all as a
result of my personal services (e.g., a consulting business), or does
some of its income arise from the services of others (e.g. employees
or independent contractors) or from the use of the corporation's
property or the sale of merchandise? And so on.

If the taxpayer can show a revenue agent a good-faith, documented
analysis whereby the compensation level was calculated, it is likely
to pass muster. No guarantees, though.

Katie in San Diego

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removeps-groups[at]yahoo.com wrote:
- quote -

It _can_ always be recharacterized if challenged and taxpayer loses the
contest over whether adequate compensation was paid.

--

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"removeps-groups[at]yahoo.com" <removeps-groups[at]yahoo.com> wrote:
- quote -

By comparison to others doing similar jobs in similar industries, when
others than themselves determine the amount paid.

Stu

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On Jun 9, 6:07 pm, se...[at]panix.com (Seth) wrote:

- quote -

The instructions for 1120-S say that if it was previously taxed income
(then it can be distributed). I don't know if this means that it
cannot be recharacterized, but certainly hope it cannot be
recharacterized. See

<Quote source="http://www.irs.gov/instructions/i1120s/
ch02.html#d0e4878"
Column (c). Shareholders' Undistributed Taxable Income Previously
Taxed

The shareholders' undistributed taxable income previously taxed
account, also called previously taxed income (PTI), is maintained only
if the corporation had a balance in this account at the start of its
2007 tax year. If there is a beginning balance for the 2007 tax year,
no adjustments are made to the account except to reduce the account
for distributions made under section 1375(d) (as in effect before the
enactment of the Subchapter S Revision Act of 1982). See Distributions
below for the order of distributions from the account.

Each shareholder's right to nontaxable distributions from PTI is
personal and cannot be transferred to another person. The corporation
is required to keep records of each shareholder's net share of PTI.


Distributions
General rule. Unless the corporation makes one of the elections
described below, property distributions (including cash) are applied
in the following order (to reduce accounts of the S
....

</Quote
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On Jun 9, 9:32 pm, Katie <katiej_1...[at]yahoo.com> wrote:

- quote -

How does one determine reasonable compensation?

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On Jun 9, 7:59*pm, raffi...[at]gmail.com wrote Hello Katie,
- quote -


Then I think you are OK, assuming $100,000 is reasonable compensation
for what he does for the corporation.

Katie in San Diego

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On Jun 9, 1:35*pm, Katie <katiej_1...[at]yahoo.com> wrote:
- quote -

Hello Katie,

Thanks for the reply. Bob made over $100K salary during both 2006 and
2007 and will be making over $100K during 2008 as well. I assume this
is enough to facilitate the $210K being paid as a distribution.

Raffi

========================================= MODERATOR'S COMMENT:
Please trim away the excess lines of text

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In article <484d7a53$0$11627$607ed4bc[at]cv.net> ,
Haskel LaPort <QBFanBoy[at]gmail.com> wrote:
- quote -

But the corp is required to pay a reasonable salary, so a distribution
can be reclassified that way.

Seth

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On Jun 9, 11:52*am, "Haskel LaPort" <QBFan...[at]gmail.com> wrote:
- quote -

Such as?

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On Jun 7, 5:11*pm, raffi...[at]gmail.com wrote:
- quote -


Raffi,

This is true, but the operative term is "he has earned a fair amount
through payroll as well." You never said whether Bob had received
reasonable compensation for his services to the corporation in 2006
and 2007, or whether he is being paid a salary in 2008.

The bottom line here is that once an S corporation begins distributing
income to its stockholder(s), those distributions must be
characterized as wages unless the corporation has already paid
reasonable compensation to them for their services. In other words,
if (as appears from your example) Bob received no salary or wages from
the corporation in 2006 and 2007, you can't avoid paying him
reasonable compensation for the services he provided in those years by
deferring the distribution of those years' earnings until 2008.

The IRS is out doing aggressive audits of S corporations looking to
recharacterize distributions as wages. What constitutes reasonable
compensation for services depends on a number of factors, but unless
Bob has already received reasonable compensation, at least some part
of this distribution must be treated as wages subject to payroll
taxes.

Also, you should be aware that the distribution, regardless of when in
2008 it is paid, will come first from the corporation's 2008 earnings.

Katie in San Diego

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<removeps-groups[at]yahoo.com> wrote in message
news:cb1a2282-2139-48f8-867f-ea3719e4656b[at]q24g2000prf.googlegroups.com...
- quote -

It depends on the type of business and future goals of management.


- quote -

Distributions are not subject to employment taxes.

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On Jun 7, 5:10 pm, "Haskel LaPort" <QBFan...[at]gmail.com> wrote:
- quote -

Good point. But if this is a single shareholder S corp, then does it
matter?

Also, if in the year you take the distributions from a prior year, if
the salaries in the year you take the distributions are not so high
because of a bad year, then do those prior year distributions become
subject to social security + medicare taxes? I would hope not.

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<raffid01[at]gmail.com> wrote in message
news:15941fc6-b210-4432-af94-1eea46b335db[at]u12g2000prd.googlegroups.com...
- quote -

Although that is an option, it's not reflective of the original question -
where as a "bonus", it was already decided to be taken in full as a wage.

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On Jun 7, 11:55*am, "removeps-gro...[at]yahoo.com" <removeps-
gro...[at]yahoo.com> wrote:
- quote -

Thanks for the reply. Going forward, Bob will not leave any retained
earnings in the company. He will be taking all the profits out at the
end of the year, while taking enough of it out as salary to maintain a
good balance between the two.

To sum things up, Bob should be able to take the $210K as
distributions during 2008 (assuming he has earned a fair amount
through payroll as well), and not have to pay additional federal or
state income taxes (as well as miscellaneous payroll taxes such as
social security) since the $210K was already taxed in 2006 and 2007,
and since it is not going through payroll. The $210K can be taken out
anytime during 2008.

Feel free to comment if any of the above is not accurate.

Thanks for all the replies.
Raffi

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<removeps-groups[at]yahoo.com> wrote in message
news:02f0acaa-9e32-4b57-a698-e5e3deae9a19[at]l28g2000prd.googlegroups.com...
- quote -

Most compaines need working capital to remain viable and grow. Distributing
all the profits may be a poor business practice.

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On Jun 6, 7:34 pm, Harlan Lunsford <hnslunsf...[at]bellsouth.net> wrote:
- quote -

But there's one other consideration. The IRS requires you to take a
fair market salary and pay social security + medicare tax on it along
with personal federal and state tax, and optionally take the remainder
as a distribution subject only to personal federal and state tax, and
if you're in California then also a 1.5% corporate tax. If you have a
good year and have 210K in distributions left after your salary of say
60K, you can decide to take the the 210K in a future year. However
say in the future year we're in a recession in your company only makes
20K but you take the 210K retained earnings as a distributions. Would
the IRS try to reclassify 40K of that 210K as a normal salary, subject
to social security plus medicare? I guess you could take the 210K as
a distribution of profits from a prior year, but not sure if they let
you do that.

In any case, why have any retained earnings in an S Corp in the first
place?

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In article <1sm2k.282$s77.149[at]bignews3.bellsouth.net> ,
Harlan Lunsford <hnslunsford[at]bellsouth.net> wrote:
- quote -

Wouldn't he have to, since it's the remainder of the $300,000 the
company earned that had tax paid on it?

Seth

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raffid01[at]gmail.com wrote:
- quote -


ChEAr$,
Harlan Lunsford, EA n LA

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >