Paying S Corp owner wages when there is no profit

[equinecpa]

I'm not sure if I'm just not seeing the forest through the trees or what (I"ve been sick and my mind just isn't back where it should be...shhh don't tell my clients)

Here's the situation. I sat down and did some financial projections for a client of mine. S-corp should have about $6000 positive cash flow each month. However depreciation will wipe this profit out and put the corporation into the negative for income tax purposes.

Should the owner just pay herself a salary that she thinks is reasonable despite the corporation's negative income tax position?

And if she wants to access the excess cash that will be in the corporation, how does she do that? I don't think she can dividend it, no accumulated earnings and non foreseen. Shareholder draw will put her in negative shareholder equity position. I'm stumped on how she should access the cash. Bonus?

Can someone shed some light please!

Carolyn

[outwest]

Salary in loss corp.

First, the corp is not required to pay salary if there is a loss even without it. Even the IRS cannot force a officer to breach their duty to the corp by stripping money and taking a salary that the business cannot afford.

However:

If there is money taken out of the corp by the shareholder, reasonable salaries had better be paid first before distributions. Salaries without distributions are fine, distributions without salaries are not.

[ttbtaxes]

Since you know something about the equine industry ..... never put the cart before the horse.

[equinecpa]

Since you know something about the equine industry ..... never put the cart before the horse.

Just trying to answer client's questions. I love clients who actually PLAN ahead.

Client has no other source of income so will need to be compensated. I was just trying to figure out what to do if she takes a reasonable salary and then needs more funds? Does she have to take it out as salary where there is no taxable income?

[outwest]

Just trying to answer client's questions. I love clients who actually PLAN ahead.

Client has no other source of income so will need to be compensated. I was just trying to figure out what to do if she takes a reasonable salary and then needs more funds? Does she have to take it out as salary where there is no taxable income?

So now we have reasonable salary assumed and that hurdle is passed. Now the shareholder employee may take distributions even if there is no income.

However....

If the shareholder basis is used up, (common in a loss corporation.) the distribution in excess of basis is taxable as a capital gain to the shareholder.

[equinecpa]

However....

If the shareholder basis is used up, (common in a loss corporation.) the distribution in excess of basis is taxable as a capital gain to the shareholder.

Thanks outwest-that's what I was looking for. I knew she had to be able to take the money out but knew it couldn't just come out as a distribution when she has no basis.

[JohnH]

So if there is substantial depreciation but no shareholder basis, this must mean that accelerated depreciation is being claimed on a financed asset. In this situation, I like to point out to the client that eventually there will likely be "phantom" S-corp income out there in the future. This results from the principal payments continuing on the loan, which soak up cash, and no corresponding tax deduction because the depreciation has already been deducted early on.