80% of S-Corp profit on K-1

[AZ-Tax]

What kind of red flag of any does this raise for a single shareholder and only employee to receive 80-90% of the S-Corp profit on a K-1 and the rest of it in the form of a W-2?

[Uncle Sam]

80% S Corp Profit on K-1

A shiny red flag that sticks out like a sore thumb

[JohnH]

Think of something about 10 ft x 20 ft, bright red, with flashing neon borders.
(and toss in some glitter, just to make it interesting)

Here's someone with an opinion on the matter:

http://www.cpajohn.com/business-taxes/s-corporation-officer-wage-trap/

Now if you think you can make a case that the salary paid in actual dollars is a reasonable salary and that the remaining profit is a result of shrewd business management or other such factors, then you might have a chance.

[veritas]

Not much

What kind of red flag of any does this raise for a single shareholder and only employee to receive 80-90% of the S-Corp profit on a K-1 and the rest of it in the form of a W-2?

Unless you mean the K-1 shows distributions of 80-90%.


Another factor to consider. A few years ago the IRS had a project to examine returns with low or no wages from an S-Corp. To the best of my knowledege they a e not doing that now.

[Uncle Sam]

Veritas - the OP was quite clear. It did not say distribution - it said profit.

[AZ-Tax]

It would be "ordinary Income"....

Upon asking my client about this my client referred to it as "a draw" taken. Well it looks to me this oridinary business income will end up on line 1 part 3 of the K-1 and flow to line 17 of form 1040.

With 5 days to file, what do you suggest?

[BHoffman]

http://ria.thomsonreuters.com/EStore/detail.aspx?ID=DBPQ&site=seo10401041

[BHoffman]

http://www.irs.gov/pub/irs-pdf/i1120s.pdf

[BHoffman]

The Tax Book Deluxe Edition Chapter 19

[BHoffman]

http://www.cpedepot.com/Applet/Course/BrowseCourse2.aspx?SiteCourseId=3545&c=0

[BHoffman]

http://classes.sis.maricopa.edu/index.php?keywords=&all_classes=false&terms%5B%5D=4106&institutions%5B%5D=GCC02&start_hour=any&end_hour=any&subject_code=ACC&instructors=

[appelman]

An old subject

This is an old subject. He is supposed to take a reasonable salary. What is reasonable is open to interpretation, but obviously at least a minimum wage. If he hasn't done so, I and others have used the stratagem of showing officer compensation, issuing a 1099-misc, and reporting on the 1040 as self-employment income. It is a flawed approach, but it may be better than nothing.

[tacks]

If he hasn't done so [taken reasonable salary], I and others have used the stratagem of showing officer compensation, issuing a 1099-misc, and reporting on the 1040 as self-employment income. It is a flawed approach, but it may be better than nothing.

Do you report the 1099-misc as 'outside service/contractor' or as 'officer's compensation' on the 1120 S?

I'm in this situation now and i would hesitate to show any salary expense on the front page of the 1120 s that didn't match the w3.

I'd be more tempted to show it as line 19, contractor expense. Officer's comp would still be zero but at least the company wouldn't be showing any profit.

anyone else have thoughts on this?

thanks

[EDIT: special thanks to appleman. this is not one of those things that i can easily look up in my book]

[appelman]

Officer comp, since that was the whole point of the exercise.

Officer comp, since that was the whole point of the exercise. It was considerably less than the profit, but more than the amount actually distributed. It is obviously a less than desirable way of doing things, but, again, hopefully better than nothing. I think the state would be most likely to complain.

[tacks]

thanks appelman