EIC and s corp

[theresa d]

i have a client who is in the construction business. this year the corp is involved in a large construction project -renovation a building and selling units as condos. it will not be completed until next year. there is very little income since none of the units have been sold yet. most of the cost are capitalized in inventory. there is a small loss for the year. he drew a salary of 15,000 and would qualify for the EIC. he also took distributions from the s corp of 50,000 for which he had basis and they are not taxable. is there any issue with the EIC given the fact that he took such large distributions from the s corp? anything else i should be addressing? thanks for any imput.

[Matt Sova]

No

Distributions are a return of basis in the S-Corp and not income. Therefore, I do not believe there is any consequences as far as EIC goes. If he sold 1,000,000 worth of stock and his basis was 1,000,000 it would not effect EIC, would it?

Matt

[Brian EA]

Distributions are a return of basis in the S-Corp and not income. Therefore, I do not believe there is any consequences as far as EIC goes. If he sold 1,000,000 worth of stock and his basis was 1,000,000 it would not effect EIC, would it?

Matt

No it would not

[theresa d]

leeway

thanks for the imput. my concern stems from the fact that an s corp has some discretion on what is a reasonable salary for the shareholder to draw. i was concerned there could be some issues concerning the fact that his distributions were significaly higher than the salary he drew, and his lower salary results in eligibility for the EIC. however i think his salary is reasonable given the fact that corp made very little income this year and the distributions are a return of his basis. are my concerns valid?

[Gretel]

Yes, your concerns are valid. But as long, as you are confident with the reasonable wage, you are fine.

And of course, the income situation plays a big role.

[theresa d]

thanks

for the quick responses! appreciated

[Matt Sova]

Reasonable

The business lost money and he took a 15k wage. Sounds very reasonable to me.