I'm bragging on TTB

[oceanlovin'ea]

I had a client call me today to tell me that I had told her and Raymond James how to do something correctly. RJ didn't believe me in the beginning.

I have a client who has an s corp and wife is a nurse. When she brought all her paperwork to me, she had a statement from RJ showing a SEP contribution of $3000. I questioned her about it because I had finished the bookkeeping for the corp and there was not any payment to RJ for a SEP contribution. She said that they had sent the money in from their personal account.
So I explained that only the corp could make the SEP contribution and opened TTB and read her what it said.
She called RJ to have them change the 5498 to read a personal IRA contribution. The next day RJ called me and said that she had gone to the department that had to redo the 5498 and they wanted to know why and what backup I had for it. I opened TTB to paid 13-15 and gave her the references that are listed...IRS Pub 560, IRC, Form 5305-SEP.

Today they called my client and told her that I was right and they were going to issue a corrected 5498. She called me and said YOU told me right and even those financial wizards at RJ learned something new from you.
I have a very happy client that will be giving my name to all her contacts.

So THANK YOU TTB!!!!!!!!! You help us to know how to give our clients good advice and provide them with excellent service. Having the resources right there is so helpful. I have never looked up info like that in IRC so I don't know if I could find what I needed.

Love you guys, Linda

[erchess]

Am Confuzzelled Royally

First of all it's amazing to me that a brokerage house that handles both individuals and corps would not know that only a corp can make a SEP contribution. Second, given that someone working for the broker didn't know that, it's amazing to me that they admitted their error without being contacted by a lawyer.

Let's just make sure I am right - a client who had a corp that could have been allowed to make a proper SEP contribution was instead allowed to make the contribution out of their individual account. When confronted with the error the brokerage fixed the problem. Is that about right? Mechanically how did they do this? Was it necessary to take the money out of the SEP, put it back in the individual account, and then move money from the Corp Account into the SEP? Or was it enough to have the corp reimburse the individual account and issue corrected tax statements? In particular did the SEP have to sell securities?

[JohnH]

They probably handled it by just changing some paperwork internally. But they cost the client about 15% not giving her correct advice to begin with, or suggesting that the client check with Linda before doing anything. A SEP contribution through the corp wold have bypassed SeocSec/Med tax, whereas a contribution to an IRA is paid with personal funds which have already been subject to SocSec/Med tax.

[oceanlovin'ea]

Internal paperwork

They just made the adjustments internally. He can as in individual contribute to the IRA account but it is only a SEP contribution if the corporation makes it.

It turned out to be a non-deductible contribution to his IRA because their AGI was too high for it to be deductible.

I too was amazed that RJ people didn't know and allowed that to happen. Maybe if I hadn't had the cites available they might have given a harder time about chainging it. But I wasn't going to let it go. Maybe it was a new person.

Thanks to great info in the Tax Book.

Linda

[JohnH]

Linda: So the RJ people cost him another 28% (plus the state rate) by not giving him good advice or suggesting that he talk with you. But you're right about TTB- it is a life saver.

[Zee]

As a devil's advocate, it isn't all that unusual for one person S-Corporations to operate from their personal checking account. What's to be done in that situation?

[Bees Knees]

As a devil's advocate, it isn't all that unusual for one person S-Corporations to operate from their personal checking account. What's to be done in that situation?

If the owner is running everything through a personal checking account and not a separate account set up using the corporation EIN, then the IRS can disregard all transactions of the S corporation and say the S corporation never conducted any business. Then tax all transactions that were run through the personal checking account as though the business was a Schedule C.

[jimmcg]

If the owner is running everything through a personal checking account and not a separate account set up using the corporation EIN, then the IRS can disregard all transactions of the S corporation and say the S corporation never conducted any business. Then tax all transactions that were run through the personal checking account as though the business was a Schedule C.

Also if transactions are being run thruogh and paid from personal accounts certain state courts may "pierce the corporate vail" and determine that a true corporate entity does not exist and therefore neither does the corporate protection of limited ;liability.

[Zee]

OK. Let's assume a personal checking account (not in the S-Corporation name) is utilized solely for the S-Corporation income & expenses and nothing else.

I would agree the IRS could require the business to be taxed as a Schedule C (if they so desired). However, I would think that if the business operated and reported as an S Corporation in all other respects, the IRS probably would not pursue this action.

As I've said before, lots of small one-person S-Corporations fail to establish a Corporate Account. I haven't heard of the any situations where the transactions have been disallowed for this reason only, but I'm sure it's happened. Can someone provide some examples, or court cases?

[WhiteOleander]

How are they pulling that off? If they receive a check for income made out to XYZ Corp, how are they depositing into the personal account. Doesn't the bank balk at this?

[Zee]

How are they pulling that off? If they receive a check for income made out to XYZ Corp, how are they depositing into the personal account. Doesn't the bank balk at this?

Good point. Perhaps I've mispoken.

The situation most often encountered is the payment of expenses from a personal account for an S Corporation, not deposits. I've generally recommended such transactions be structured as loans in the Corporate minutes.

But, I suppose it's be possible to open a business checking account (not a personal account) and operate with a business identity that does not identify the Corporation status. Of course, this wouldn't be prudent since it would negate the liability benefits of a corporation.

[geekgirldany]

Regarding brokers and staff not knowing on the SEP... alot of them don't know much about the differences or limitations. I had one customer that sent money to his broker/investment advisor through the year back in 2006 I believe. Customer had a SIMPLE and the limit was $12,500... he had sent in $19,000. When I talked to the advisor she was telling me the rules for 401K not Simple. So I had to email information with the differences. It was corrected and the overage was put towards the next year. Customer is no longer with that investment advisor

[AJsTax]

Very disappointing

I was involved in one this year where my client was talked into investing money into a Roth IRA account without any questions about income, etc. Come tax time he gives me the information and I have to tell him that he is not eligible to do a Roth due to income phase out rules. Had him call, actually his wife called the company, not even the local broker/sales person and tell them the situation. The customer service rep for this national company said that she had never heard of such a thing!! She did not believe it but would check around and call the client back. Now my client had a bit of doubt about me, though not much as they have been with me for many years. Lo and behold, a couple hours later the service rep called back and admitted that I was right and they would take steps to roll the contribution to this year. Wait a minute!! that won't work if income is the same as last year. Well, I don't know what we can do for you then, I will get back to you..All that from the corporate office a company out there selling these plans every day!! (They did finally come up with a solution).
This is not the first time I have had trouble with those selling retirement plans not knowing the rules and causing trouble for my clients. I know there is a learning curve with any business, we all started somewhere, but the rules on income limitations and contribution limitations should be the very basic knowledge required.

[Bees Knees]

As I've said before, lots of small one-person S-Corporations fail to establish a Corporate Account. I haven't heard of the any situations where the transactions have been disallowed for this reason only, but I'm sure it's happened. Can someone provide some examples, or court cases?

Where do you get this lots of small one-person S Corporations doing this? Every S corp I have ever worked with has its own separate corporate account. I make sure of it before working with them on their taxes.

As to court cases, see TTB page 8-13 under the heading "Paying Expenses of an Employer." The court case cited was where a shareholder / employee of his / her corporation paid corporate expenses out of his / her personal account. The court ruled these expenses non-deductible because they were expenses of the corporation, not the shareholder / employee.

[Zee]

I'm sorry, I shouldn't have used the term "lots of", and used "some".

Thanks for the reference to the court case on TTB 8-13. Bees, I don't mean to be a PITA (honest). But, this case disallowed the deduction by the "employee", not the Corporation since it was a Corporate expense. It doesn't say it wouldn't be deductible to the Corporation.

Weren't we talking about a sole shareholder paying corporate expense with a personal check?