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Equalizing tax burden between S Corp shareholders

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    Equalizing tax burden between S Corp shareholders

    My shareholders have very different tax brackets due to spousal income. Can I calculate the impact of pass thru income on each member's individual tax return, then charge the S corp for the taxes (a non deductible Sched M on the 1120S) and then reimburse the shareholders for their respective burdens. My theory is that the tax cost is the combination of what all the shareholders pay. I can't reimburse the shareholders thru distributions because they wouldn't be pro rata. Anyone know reasons why I can't do this? Why I shouldn't? Thanks!

    #2
    Originally posted by slbcpa View Post
    My shareholders have very different tax brackets due to spousal income. Can I calculate the impact of pass thru income on each member's individual tax return, then charge the S corp for the taxes (a non deductible Sched M on the 1120S) and then reimburse the shareholders for their respective burdens. My theory is that the tax cost is the combination of what all the shareholders pay. I can't reimburse the shareholders thru distributions because they wouldn't be pro rata. Anyone know reasons why I can't do this? Why I shouldn't? Thanks!
    Never heard of it and dont think its a good idea. At the end of the day its NOT the corporations expense and therefor its a unequal shareholder distribution of sorts which is a no no.

    Chris

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      #3
      I agree with Chris. Sounds like a distribution.

      Comment


        #4
        Is there anyone who thinks this might be ok?

        And thank you to the other two that replied.

        Comment


          #5
          Distributions have to be in stock ownership %. There is no method of doing anything else other than salary which seems really strange. Can I call up a publicly traded company and tell them my marginally bracket and request they adjust my distribution accordingly?? If they want less to be taxable sell part of the stock.

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            #6
            Thank you. I understand distributions have to be equal. I'm trying to make the tax burden be a non deductible tax expense of the S corp. Charge the S corp for the tax - it's a nondeductible expense -
            Schedule M item so all income is still reported prorata to the shareholders, then reimburse the shareholders for the portion of the tax (the non deductible expense of the S Corp) they paid. Like a non deductible portion of life insurance, or travel. I realize this is outside of the box and so that's why I'm seeking some guidance. Thanks.

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              #7
              Agree with others. Can't see where this can be anything other than an additional distribution -- i.e, having the S-Corp reimburse each shareholder for their respective tax cost due to how their individual tax return is impacted by their particular individual tax circumstances. You even state the vast differences in these rates is due to spousal income. Why should one shareholder receive more than any other who doesn't have spousal income? Each shareholder must be treated equally, regardless of their individual tax situation. Any such payment also would not be an ordinary and reasonable expense of the corporation -- deductible or not.
              Last edited by Burke; 11-15-2017, 04:03 PM.

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                #8
                Even if it were allowed, the non-deductible would ding the basis of each shareholder. If the lower taxed s/h wants to subsidize the higher taxed s/h he could always make a personal gift from his share of distribution to the other s/h.

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                  #9
                  Ah. The personal gift. I like that. Thank you.

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                    #10
                    Actually, I was being a bit sarcastic in the gift. If you actually want to go that way, make sure it meets the definition of a gift.

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                      #11
                      Originally posted by kathyc2 View Post
                      Actually, I was being a bit sarcastic in the gift. If you actually want to go that way, make sure it meets the definition of a gift.
                      You could probably equalize the personal taxes via a bonus at year-end. But with all the adjustments for payroll taxes and other ancillary effects, the permutations would be almost endless. You'd probably need to run down to 4 or 5 levels of progressive calculation just to hit a ballpark net figure. Good luck explaining that to all the shareholders when you're finished with a couple of pages of spreadsheets.
                      "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

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                        #12
                        Same

                        I have a client in the same situation with his good friend. The good friend’s earnings are less than my client and therefore, my client pays a greater amount of tax on the flow through income of their co-owned S Corp.

                        My suggestion was to calculate the approximate tax rate of my client (higher rate), then figure the tax on the flow through income (they are 50/50 shareholders) and take an equal distribution for the highest rate.

                        This way they really both nenefit. My client gets his taxes paid in full and his buddy also has his tax paid and a little extra. My client doesn’t mind because they are good friends. Your clients should be able to work this out.

                        Another alternative is to have the one shareholder that makes out better (in my case the good friend), use the extra cash to slowly purchase shares from the other shareholder with the higher tax rate. This way the lower bracket guy has more of the S Corp income taxed at his low rate.

                        Even another alternative is to, instead of purchasing shares from the other guy, have the client in the lower rate make capital contributions to the company so the “extra” money is reinvested in the business.

                        If these sound like crazy thoughts, it’s because I’ve been home all day with the kiddos; cabin fever is setting in!!
                        Circular 230 Disclosure:

                        Don't even think about using the information in this message!

                        Comment


                          #13
                          Same

                          I have a client in the same situation with his good friend. The good friend’s earnings are less than my client and therefore, my client pays a greater amount of tax on the flow through income of their co-owned S Corp.

                          My suggestion was to calculate the approximate tax rate of my client (higher rate), then figure the tax on the flow through income (they are 50/50 shareholders) and take an equal distribution for the highest rate.

                          This way they really both benefit. My client gets his taxes paid in full and his buddy also has his tax paid and a little extra. My client doesn’t mind because they are good friends. Your clients should be able to work this out.

                          Another alternative is to have the one shareholder that makes out better (in my case the good friend), use the extra cash to slowly purchase shares from the other shareholder with the higher tax rate. This way the lower bracket guy has more of the S Corp income taxed at his low rate.

                          Even another alternative is to, instead of purchasing shares from the other guy, have the client in the lower rate make capital contributions to the company so the “extra” money is reinvested in the business.

                          If these sound like crazy thoughts, it’s because I’ve been home all day with the kiddos; cabin fever is setting in!!
                          Circular 230 Disclosure:

                          Don't even think about using the information in this message!

                          Comment


                            #14
                            Clearly a Distribution

                            call it by any other name if you wish. The plan creates unequal distributions which must be dealt with by the corporation to compensate for the inequality. Not a good idear.

                            Comment


                              #15
                              Hmmm, no

                              Originally posted by Snaggletooth View Post
                              call it by any other name if you wish. The plan creates unequal distributions which must be dealt with by the corporation to compensate for the inequality. Not a good idear.
                              How? The distributions are equal. Let’s say higher tax guy’s tax liability is $15,000. Lower tax guy’s liability is only $12,000. You just make a $15,000 distribution to each shareholder. What the lower taxes shareholder decides to do with the extra funds is up to him.
                              Circular 230 Disclosure:

                              Don't even think about using the information in this message!

                              Comment

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