Scorp officer participation

[BHoffman]

I have a new SCorp client and no officer payroll was issued. They have around $50k in taxable profit. The sole shareholder spends less than 500 hours per year in active participation. There is an onsite superintendent in charge of operations and inhouse bookkeeper in charge of administration. He just signs checks. He has taken no drawings. FS-2008-25 exception seems to apply here. Is some disclosure required? Should I attach a statement referencing the Fact Sheet?


Thanks for your advice.

[Nashville]

Not too late

If this is an accrual basis taxpayer, it is not too late to accrue a payroll to the shareholder. Just make sure it is actually PAID by the due date of the return.

The owner may not really wish to take draws, and may not wish to be paid. There is nothing stopping him from taking the payroll proceeds and making the corporation a loan, or for that matter, issuing more stock that doesn't have to be repaid.

If he is not amenable to any of this, the consequences of not reporting officer salaries should be explained to him.

[veritas]

If he took nothing out

I have a new SCorp client and no officer payroll was issued. They have around $50k in taxable profit. The sole shareholder spends less than 500 hours per year in active participation. There is an onsite superintendent in charge of operations and inhouse bookkeeper in charge of administration. He just signs checks. He has taken no drawings. FS-2008-25 exception seems to apply here. Is some disclosure required? Should I attach a statement referencing the Fact Sheet?


Thanks for your advice.

nothing needs to be done.

What's your client doing for health insurance?

[ChEAr$]

Nothing?

nothing needs to be done.

What's your client doing for health insurance?

needs to be done?

If the corporation and/or he were my client, I would certainly recommend at least some salary based on the 500 hours of service. The whole 50k doesn't need to be re classified as salary, but certainly a reasonable amount. I have a similar client who balks every year at my suggestions (of course he takes them!).

It's still January and 941's aren't due until the 31st.

But I can't agree that nothing needs to be done. At least we have the duty to recommend that he do the right thing,
Still his decision.

[veritas]

What am I missng?

Nothing was taken out of the corporation. If he had taken out some payments I would totally agree.

By the way you can not accrue wages to a related cash basis party for tax purposes.

[Nashville]

Cash Basis

By the way you can not accrue wages to a related cash basis party for tax purposes.

Virtually, you can't accrue ANYTHING for a cash basis taxpayer. Ms. Hoffman did not specify whether her S corp was cash or accrual.

I agree that if no draw was taken, then there was no payroll for 2008. Could a "zero draw" be augmented to reflect wages, withholding, matching, and then a loan to the corporation for the amount of cash?

Mathematically, it can be done. Would I do it? Not unless a directive existed prior to the end of the year.

[BHoffman]

The Scorp files on the cash basis, and I'm not so sure you can accrue wages to a >2% shareholder anyway.

I'm gonna do nothing. I'm good at that and we should stick with what we're good at. And veritas said I could

The Scorp doesn't pay any health insurance.

[ChEAr$]

What are you missing?

Nothing was taken out of the corporation. If he had taken out some payments I would totally agree.

By the way you can not accrue wages to a related cash basis party for tax purposes.

the fact that the S corporation was profitable. Doesn't matter whether money was or not
distributed, such a 50,000$ profit with no officer salary raises a red flag with IRS.
Or it will should they look at it.

[BHoffman]

I'd agree with you, Harlan, but that FS-2008-25 specifically states that if de minimus services were rendered and no drawings were taken, then no salary has to be made. This fellow's daughter suffered a bad car accident and he has been spending most of his time helping her with rehabilitation. He also has a Sch C landscaping company and spends the rest of his time with that. I don't know yet, but it could be that his profits from the Sch C landscaping endeavor will max out the SS anyway.

This leads to a larger problem. Should we intentionally have our clients overpay taxes to avoid "red flags"? That isn't fair. Like most of us, I'm scared of the IRS and the power of the government. Fear aside, this particular guy is covered under that FS in every way. His daughter was in a horrid car accident. He's been very busy every day helping her with rehab so she can walk again. He also has that side business. He honestly did not take any drawings, and he honestly did not materially participate in the daily operations nor did he make any management decisions for that SCorp. Accordingly, he did not take a salary as he provided no services. If IRS questions his return, then we'll respond adequately.

I don't want to get buffaloed into advising clients to roll over on deductions and other tax matters to which they are legally entitled. I want to prepare good tax returns based on the law and the facts. This is bad news and I don't like it at all.

[S T]

No Drawings or Distributions

Thought, wouldn't this Shareholder be okay, since there were no drawings and he was not trying to disguise drawings/distributions to avoid the S Corp wage issue!

Seems like the scenario you posted, if audited, you have a lot of facts and circumstances to provide! Not that any of us would like an audit on the issue, but your taxpayer seems to have an unusal circumstance and hopefully well documented.

In the future, for 2009, maybe he should take a minimum wage out for W-2 purposes based on his hours and what would be an adequate hourly wage.

Sandy

[BHoffman]

Point well taken

Sandy - I surely do not like audits, but believe it as illegal and unethical to prepare a return overstating income as it is to prepare a return understating income. I just want to do a good job in accordance with the IRC, based on the facts I get from the client and do my due diligence and get on with my life. This whole concept of the IRS launching an attack on tax practitioners thing is just plain wearing me out. Hmmph

[S T]

Agree

I agree, and have been reading all of the posts and other information. I, like you am just trying to do my "job" and advise clients appropriately!

I know you will arrive at the right conclusion and you will have performed your due diligence.

Sandy

[BHoffman]

Yep. And after all that, I'm still taking veritas' advice about doing nothing.

[Snaggletooth]

Bottom Line

I am crawling into bed with Harlan on this (as disgusting as this may sound).

First Ms. Hoffman, you are to be admired for identifying with your client and your willingness to stand up for him. You have done nothing "wrong." I've always thought you were one of the great people who share their mind on this board.

Not reporting a salary for a Scorp raises a red flag. No one at IRS knows that his daughter had a wreck. No one at IRS knows his involvement is minimal. If he donated a kidney for a total stranger, IRS wouldn't know this either.

Do you want the red flag? Is your strategy to raise the red flag, possibly run afoul of Uncle and then pour out the qualifying memo, and the wreck, and the other proprietorship, etc.

You might consider making one of the more involved employees into a corporate officer, such as a VP or Treasurer, so that you would have something to report as "salaries for officers."

[BHoffman]

Better late than never

No, of course I don't want the red flag. I'm no fighter. It's just that I don't want to feel bullied into making bad decisions out of fear either. Believe me, I am all over my Scorp clients making sure they take that reasonable salary if they are supposed to. This is the only guy I have who appears to be covered under that FS. If this matter is questioned, then I'll prepare a response that should be adequate. Otherwise, I'm not losing sleep over it.

Speaking of, aren't you up pretty late ? Nice to see you, don't think you've been around lately.