Assign Corporate Income to Sole Proprietorship

[irs_gnfr]

Hi Everyone:

Can a sole owner of an S-corporation choose to assign the S-corporation income to his personal return ( Sole Proprietor / Schedule C ) ? The 1099-Misc was issued with S-corp name and EIN. I will report the 1099 income on S-corp return, and zero it out with "other deductions" entry.

I don't have any court cases or tax regulations or experience with IRS auditors to back this position up. I'm just guessing that if IRS audited this, they will be satisfied so long as someone reported the income.

( On a side note, I'm doing this because taxpayer is facing a 14 k tax bill for advanced premium tax credits that he has to pay back. His income was 401% over limit. If he can shift his income to personal return, he will be able to utilize home office deduction, which will lower his AGI. Then, he will only have to repay 2,500 of APTC.

Thanks for all your help in advance.

Best, David

[TaxGuyBill]

No.

The corporation was hired, did the work, and was paid. You can't lie and say it was actually a Sole Proprietorship. Doing so could be tax fraud.

What was done with wages and distributions? Would it be possible for the corporation to contribute to a SEP, which would reduce box 1 on the K-1?

[MDEA]

Assigm coporate income

Did the main participant take salary?

[Lion]

Shareholder/employees deduct expenses on Form 2106 to Schedule A miscellaneous 2%. Between AMT, the 2% haircut, and his state which may or may not use itemized deductions, what your client is trying to do might not help him.

[JudyL]

I agree with TaxGuyBill that what you are proposing would be to circumvent the tax laws and would be construed as you preparing fraudulent returns.

Your client's best option is as he suggested, that is if your client took enough salary from the S corp. It may be of enough benefit to have the S corp set up a SEP IRA and contribute to it so to reduce the income flowing from the S corp to the personal return.

Going forward, instead of trying to use the home office deduction on the personal return, consider having your client set up a reimbursement plan, maintain proper documentation, and have the S corp reimburse the shareholder on a monthly basis for those expenses that are properly allocable to its operations. This is not without limitations though. It's allowed under code sec 132, but limited to income from the business activity under 280A. You might check out 1996 TC Memorandum Cunningham vs Commissioner.

[irs_gnfr]

Did the main participant take salary?

No, he never paid himself any salary. But, he took out distribution of every penny of income made in 2015.

[Snaggletooth]

There is a way

There is a way to do what your client wishes in a roundabout way, but it is messy and time-consuming. You should make sure he gets enough benefit to pay your fee.

Issue a 1099-MISC from the S Corp to the owner (assuming he is 100% owner). This should result in self-employment income to report on a schedule C, and probably reduce his K-1 to virtually zero. He then can deduct his home office if otherwise qualified to do so.

IRS would probably frown on this, except years ago they began encouraging transferring income from S-corps to individuals to enhance social security collections. In fact, if he fails to report SOME sort of the self-employment income from the S-corp, he could be in danger of the IRS taking action to do so.

[Lion]

But, a shareholder who performs services for the corporation receives a W-2 and reports unreimbursed employee expenses on Form 2106. Other items pass through on the K-1.

He would need to document that he does in fact have a different business, a sole proprietorship, through which he performed services to the S-corporation as an IC. Did he in fact hold himself as an individual IC in business, other clients, etc.? As 100% shareholder, I think the IRS would expect him to perform any corporate functions and doubt that he actually acted as an IC when working for the S-corp.

More than the IRS, the DOL (and probably his state DOL) are actively pursuing employee vs. IC issues. A large number of states have covenants to share information with and from the federal DOL. It seems the feds provide leads to the states.

[David1980]

Whatever you decide to do with the current return I suggest you make it very clear to taxpayer that going forward it has to be done properly. It's an easy trap to fall into where a preparer "fixes it" to correct or work around a clients errors. It's easy to make excuses for the client after all "They didn't know they had to do payroll" etc... Let them continue to do it wrong and the question you should be worried about is "Why did you preparer these returns incorrectly?" I suspect a lot of the preparers that end up in trouble started down that road innocently enough.

[DaveO]

I did this a number of years ago for a different reason. The shareholder had failed to take any salary from the corporation. He was audited for a number of reasons and I was informed this was a major no-no. In the end however he had made so many mistakes that the auditor yanked all the income off the corporate return and put it on the "C". I think your client has problems beyond the ACA penalty.

[Burke]

Sounds like the auditor made the unilateral decision to yank the S-Corp status of his company.......