S Corporation Tax Planning

[geekgirldany]

I am starting to go through people's bookkeeping now to estimate how much tax they may owe for tax year 2005.

Client has a S-Corporation. He will be netting around $50,000 for the year. I worked up some different numbers taking into account him buying some new equipment for $3000 and a quick look at doing an IRA. Neither really save him alot of money. It is around $500 in savings if he does one or the other (New equipment or IRA). He also hasn't taken a payroll for the whole year. They money is there and he is doing very well in his business. But he says he doesn't need it now and wants to build it up. I still recommended he take some payroll.

I'm trying to find out some other ways for him to save on taxes. New equipment is the biggest one I can think of. IRAs as I said before save a little. Is there anything else that could possibly save him on taxes?

He says he doesn't need alot of equipment now so that is out. Doesn't need a truck either.

I just want to make sure I am not missing something. He has been contacting me about buying land and putting it in the business name. I advised him that you can not depreciate land. But if it has a building on it he could depreciate it as long as it was used for business only purposes like for storage of equipment or ideally an office. I then mentioned that I was always hesitated in recommending this because alot of the time it ends up being used personally, if not being used for a business office. Plus it is depreciated out over 39 years. Not huge benefit there.

Any advice here would be very appreciated

Thank you

[Unregistered]

Pay $25,000 wages, do a SEP for $6250.

[Gretel]

S-Corp

I am no expert on tax savings. Two red lights came on while reading your message.

First: He needs to take out some payroll if he doesn't want to end up paying payroll taxes plus interest plus penalty on all distributions.

Second: Never, ever put real estate in a corporation because gain needs to be recognized when transfered to personal use. For a C-Corp. then of course you are also facing double taxation.

Hope someone else will have good ideas on tax savings. I struggle a little bit with that subject myself. Good luck.

[lsmith]

Payroll

is a must! Sure beats penalties & interest and is always a deduction. If needs be, he can always loan it to the corporation.

[taxmandan]

S-Corp planning

He also hasn't taken a payroll for the whole year. They money is there and he is doing very well in his business. But he says he doesn't need it now and wants to build it up.

So what money is he using for living expenses? Could have other income sources, but I always check on whether the owner of an S-Corp. has been taking distributions that should be classified as payroll. If the business is growing fast and he wanted to keep the money inside for growth purposes he should not have elected Sub-S status. That is one of the situations where a C-Corp is a better choice. Anyway, he does need to take some payroll, the IRS is looking at that issue with S-Corp. returns.

[geekgirldany]

Thank you all for responding.

I know he needs to do a payroll I keep on mentioning this to him. I told him that this raises a red flag to the IRS. He is an officer and needs to take out some payroll. He went to a business coach for some reason. Even the coach told him he didn't know how his business was doing without him taking a payroll. I told him I didn't even know he was doing that well this year. Everytime I talked to him he talked like business was bad. Then he brings this to me and he is doing well. I told him that there is no reason not to take a payroll. He just is dead set against it.

I am looking through some retirement plans to see if this would help at all. I know a regular IRA won't but as the poster mentioned... a SEP.

That is the strange thing... he has only taken out probably $5000 in distributions. Now this is according to him doing his own bookkeeping on QuickBooks. I looked through it really good and I didn't see anything else that stood out as distributions. I will look again.

I don't see how he is living either. I mean his wife is working fulltime now. So they must be living off her money? Now the previous year his business made a profit but very little. I counted all his distributions as payroll that year. He also took out more distributions last year then this year.

That is a good idea of doing a payroll then loaning it back to the company. On the real estate... see I knew that was never a good idea in a corp name.

Before I got off the phone with him he said he would ask around to see what others are doing to save money on taxes. I didn't say a word. He said "not that you don't know what you are doing... but you know". I told him that there are two things going to happen in life... death... and taxes. You make the money you have to pay the taxes. Sometimes there is no way around that.

[JG EA]

Suta

I know everyone has already said he needs to do payroll. Here is another reason: SUTA taxes.

Some states look hard at draws/distributions if there is not a reasonable wage and charge back taxes, interest, penalties. This may be more a possibility than the IRS doing so.

[lsmith]

Suta

I have seen several occasions where state auditors went over the write ups for a client and backed in taxes when an officer was not on a payroll but took distributions. They also presented penalties and interest. Its always a good idea all the way around to have an officer on payroll rather than just the distributions. They can still take the distribution if needed.

[geekgirldany]

Well I guess this is the first time I have had a client not want to take distributions or payroll. I just got off the phone with him again. I told him he had to do payroll. Atleast as much as he would pay someone who worked for him. I told him the money could be loaned back to the corp if needed. Thank you to lsmith for mentioning that. I also told him a SEP would help lower his taxes some.

Thank you all for you comments. Really does help talking things like this through.

[Armando Beaujolais]

Everytime I talked to him he talked like business was bad. Then he brings this to me and he is doing well. I told him that there is no reason not to take a payroll. He just is dead set against it.

Before I got off the phone with him he said he would ask around to see what others are doing to save money on taxes. I didn't say a word. He said "not that you don't know what you are doing... but you know". I told him that there are two things going to happen in life... death... and taxes. You make the money you have to pay the taxes. Sometimes there is no way around that.

I'd be very cautious. From what you've said it sounds like this guy wasn't straight forward with you (said he was doing poorly, then all of a sudden there's a big profit that he doesn't need). Then he won't listen to your advice. He doesn't want to go about things in a legitimate way (even Coach said he needs to be taking a wage), and wants you to "ask around" (nod, nod, wink, wink).

All of those factors combined are very troubling. I'd seriously consider sending this guy a "Dear Client" letter. You're not going to need the headaches with tax season coming up. At least decide what you're going to do with it, and don't give him an inch when he tries to cajole you into doing something you're not comfortable with.

And to confirm what others have said. It would be difficult to think of a more likely candidate for an audit in these times than a closely held S corporation with a bunch of profit and nobody taking any wages. You'd better make your fee for representing him at audit clear right now.

[geekgirldany]

I'm a little suspicious to say the least. I just had to tell him yesterday that he would get audited if not taking a payroll. It like I had to say that one word and he was a little more interested in following my advice.

I've started including the following on all emails with tax advice in them:

IRS Circular 230 Disclosure: Unless expressly stated otherwise in this transmission, any tax advice contained herein, forwarded with or attached to this message was not and is not intended to be used, nor may it be relied upon or used, by any taxpayer for the purpose of (1) the avoidance of any tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any tax transaction or tax-related matters that may be addressed herein.

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Client said he saw that and said "well I guess you really can't tell me how to save money on taxes then". I told him "no, that is part of my job to do tax planning. But I'm not going to advise him to do something that I know isn't right". I think he got the message. He might end up being getting a "dear client" letter.

Thank you all again for the comments.