Uncashed Check

[buzzardbreath]

100% owner of a successful S-corp has no employees other than himself. We have established his pay from the S-corp to be $80,000 per year. Normally, this is less than the S-corp profit in most years.

On December 27, 2013 we paid the $80,000 from the corporation to himself and issued W-2, W-3 accordingly. A payroll tax deposit of roughly $12,000 was made timely.

Owner went ALL of 2014 holding a $70,000 check and never cashed it. He never needs $$ from the corporation. I was outraged, and told him we were now confronted with either refiling all forms for 2013, or taking the $70,000 into income for 2014.

No one wants to deal with re-filing the payroll 941s etc and besides the SS records are already updated, and p/r taxes were paid. However, the $80,000 salary was a "wash" as such, meaning he has to pay on $80,000 wages, but the corporation was able to deduct the $80,000 from his K-1 allocation of ordinary income. Not exactly a wash but at least for the most part.

If we take the $70,000 uncashed check into income for the corporation in 2014, where would the "wash" offset occur on his personal return?

[ATSMAN]

100% owner of a successful S-corp has no employees other than himself. We have established his pay from the S-corp to be $80,000 per year. Normally, this is less than the S-corp profit in most years.

On December 27, 2013 we paid the $80,000 from the corporation to himself and issued W-2, W-3 accordingly. A payroll tax deposit of roughly $12,000 was made timely.

Owner went ALL of 2014 holding a $70,000 check and never cashed it. He never needs $$ from the corporation. I was outraged, and told him we were now confronted with either refiling all forms for 2013, or taking the $70,000 into income for 2014.

No one wants to deal with re-filing the payroll 941s etc and besides the SS records are already updated, and p/r taxes were paid. However, the $80,000 salary was a "wash" as such, meaning he has to pay on $80,000 wages, but the corporation was able to deduct the $80,000 from his K-1 allocation of ordinary income. Not exactly a wash but at least for the most part.

If we take the $70,000 uncashed check into income for the corporation in 2014, where would the "wash" offset occur on his personal return?

If you don't want to amend 2013 and charge accordingly, I would tell him to take the W2 income in 2014. Check might be stale so cut a replacement check.

[Corduroy Frog]

No replacement check

Thanks ATSMAN. I believe the corporation needs to take $70,000 in income by virtue of him not cashing the check. This positions the check as no longer viable, and a replacement check should not be issued. Owner has no need for the money and would rather keep the money in the corporation.

Since the original $80,000 was a "wash" (for the most part), then I'm looking to see where the "wash" is for this year on the $70,000 the corporation takes. During the year of payroll, the owner had to claim $80,000 on his personal return, but the corporation deducted the same $80,000 as expense.

[mastertaxguy]

Uncashed checks

1. Might want to consider if the uncashed check is an asset subject to the resident state's unclaimed property laws, particularly if on a state income tax or payroll tax form(s) the $70,00.00 was reported for SUTA/FUTA or state withholding purposes.
2. There are several court cases involving uncashed checks and payroll tax assessments.
3. From this vantage point, while this looks like an omlette easily unscrambled, there are some pitfalls to be considered and/or avoided.

[Maribeth]

Have him cash the check and immediately give it back to the corporation as Additional Paid-In Capital. Or void the check as of 12/31/14 and record it as Additional Paid-In Capital.

[Corduroy Frog]

Additional Paid-In Capital

Maribeth, this sounds like the most plausible solution of any I've heard yet.

This is an S-corp. Does this influx to "additional paid-in capital" increase his basis in the corporation? I would think so, similarly to a contribution. However, this corporation is not a "going concern" because when he retires, it will not continue. How will the owner ever benefit from an increase in basis? He certainly would not be entitled to take a "loss"...

[spanel]

why not void/reissue the payroll check and he deposits it asap? He's already paid income tax on this on his 2013 tax return... its his money he just didnt follow through and deposit it. On the January 15 book, the outstanding check will clear.

Chris

[Maribeth]

Maribeth, this sounds like the most plausible solution of any I've heard yet.

This is an S-corp. Does this influx to "additional paid-in capital" increase his basis in the corporation? I would think so, similarly to a contribution. However, this corporation is not a "going concern" because when he retires, it will not continue. How will the owner ever benefit from an increase in basis? He certainly would not be entitled to take a "loss"...

Yes, it does increase his basis in the corporation. I don't understand your comment about "going concern". It appears that the corporation is doing well and is not in danger of closing until the shareholder retires. That would not negate the shareholder putting more money into the corporation. In effect, by not cashing the payroll check, he has left the funds inside the corporation anyway.

[Burke]

why not void/reissue the payroll check and he deposits it asap? He's already paid income tax on this on his 2013 tax return... its his money he just didnt follow through and deposit it. On the January 15 book, the outstanding check will clear.

Chris

I agree. A void/reissue of the check does not change the fact that it was recorded, paid and issued in 2013, with all the proper tax and income reporting both from the corporation and him individually (I hope.) If he wants the money to stay in the corporation, then he can just pay it back to the corp as paid in capital as Maribeth said. And it does increase his basis.

[NotEasy]

Doesn't the "constructive receipt" doctrine apply to this case? He was in possession of the check in 2013. He had the full ability to deposit the check in 2013. But he chose not to. If that's the case, shouldn't it still be considered his 2013 income?

[TXEA]

I agree with Maribeth. If he deems the salary to be a contribution to capital, then it will increase his basis, and it would be part of basis for any future liquidation gain/loss.

If this had been a rank and file employee would you amend the tax return? No, you would have just reissued the check. So, as long as the corporation had the funds in the bank at the time the original check was written, then the salary check was legitimate, and there was no intent to deceive. The guy just did not cash the check. The corp received the deduction, and he reported the income from the W-2.

Really, other than the shear annoyance that he did not cash the check, the only reason I would be concerned is if at the time the check was written, the corp lacked the necessary funds to negotiate the check.

[Burke]

Doesn't the "constructive receipt" doctrine apply to this case? He was in possession of the check in 2013. He had the full ability to deposit the check in 2013. But he chose not to. If that's the case, shouldn't it still be considered his 2013 income?

Apparently it was, and all appropriate taxes on it were paid at that time. That is not the issue, as I understand it. It's what to do with it now.