Sch C, 1 member LLC, paying member & deducting it

[AZ-Tax]

Upon looking at my prospects past tax returns, negative 6 digit net profit for last 3 tax years. No family income from spouse being employed, interest dividends rental etc. basically only line 12 on form 1040 has an amount. I asked prospect, how do you pay your bills like mortgage payment, vehilce payment, food, clothing etc. Prospect replies I take out $103K (not thru payroll so NO W-2 was issued) then its deducted as a business expense like my CPA told me.

Do I not know the potential of Sch C's or is something smelly here?

Propects business does have employees and pays them via payroll.

[taxxcpa]

Sch C taxpayer deducting draws

Unless he issues himself a W-2, he cannot deduct it. Although a sole proprietor is not supposed to issue himself a W-2, it will be accepted since he will pay the same income tax and social security as if he had not deducted it.

He might even get by with issuing himself a 1099 as long as he pays the income tax and SS on the 1099 and files it as another Schedule C.

The right way is to take it as a "draw" and take no deduction so that his profit will not be reduced by the draw.

[Burke]

Prospect replies I take out $103K (not thru payroll so NO W-2 was issued) then its deducted as a business expense like my CPA told me.
Do I not know the potential of Sch C's or is something smelly here?

Yeah, it's smelly. Did his CPA also do his personal return and not show the "draw" as income on the 1040? Sounds like TP is in deep muck and I am surprised he hasn't been flagged with an audit due to the numbers. Your red flag should have been the IRS's red flag too. Exactly where on the Sche C was it deducted as an "expense?" Sounds like substantial underpayments based on FT, ST, & SE on $103K X 3. Plus whatever other tax ramifications that omission had on his MFJ tax return.

[Bees Knees]

Prospect replies I take out $103K (not thru payroll so NO W-2 was issued) then its deducted as a business expense like my CPA told me.

I would tell prospect he/she is no prospect of mine until he/she fixes the problem and pays all the back taxes he/she owes. I don't do work for tax evaders.

[erchess]

Tax Evaders

I don't care for tax evaders either but I will help them fix things if they want to pay me. And I'd only make him go back to the three open years.

[Gary2]

I don't care for tax evaders either but I will help them fix things if they want to pay me. And I'd only make him go back to the three open years.

Understandable, but I'd worry about the 6 year statute of limitations for significant understatements.

[erchess]

Point Taken Gary

I honestly forgot about that six year deal but it would seem to apply to this set of facts. And going back six years is not too much of a burden unless the original returns are not available which tends to be the case with my clients.

[luke]

a-z

a-z how have you been getting "MY prospects"? :-)
dont you love "my cpa told me to do it?"