LLC filing as C-corp question

[tracyb]

Could someone please give me some feedback on the best way to handle the following?

1. 2005 1120 was filed showing consulting fees as an expense. The consulting fees were actually paid to the sole shareholder. There is no payroll set up for the corp. How should this be handled on the shareholders return? Any changes for the corp return?

2. Sole shareholder personally owns the truck which is used 100% for this C-Corp. Mileage has previously been claimed on this vehicle in a prior year (before corp) as unreimbursed business expense. How would it be handled now that it is totally used for corp business? Could the C-corp lease the vehicle from him?

3. Home-Office deduction for C-corp? Would it be best to lease the office space to the corp?

Any suggestions are greatly appreciated!

Tracy

[Roland Slugg]

Shareholder dealing with his C corp

Dear tracyb

First, the fact that the entity may be legally organized as an LLC is irrelevant. If it has elected to be taxed as a C corp, that is all that matters for tax purposes.

Regarding the consulting fees, those should have been reported on a 1099-MISC form issued by the corp to the shareholder for the year 2005, and the shareholder should have reported those fees as income on Schedule C of his own return. If the consulting fees were really salary, the IRS could and, upon audit, probably will reclassify those fees as salary and assess payroll taxes to the corp, along with penalties and interest. If it does, there would be a correlative adjustment for the SE tax paid on the same fees by the shareholder. In order for the consulting fee approach to survive an IRS challenge, it will need to be shown that the shareholder doesn't actually work for the corp, in a bona-fide employer/employe sense, but rather acts in the true capacity of a consultant. This will likely be a difficult issue on which to prevail.

Regarding the truck, the shareholder could lease it to the corp. If he does, the lease payments would be reportable as income on his own return. Another, probably better way to go would be for the corp to reimburse the shareholder, at the standard mileage rate, for its use of his truck.

A corporation can not deduct OIH expenses. If a room (or rooms) in the shareholder's home are used by the corp, the corp can pay fair rent for that space. Again, the rent received by the homeowner would be taxable to him, but he could, in turn, deduct direct and allocated expenses, including depreciation. If this is arranged, the corp should issue a form 1099-MISC for the rent paid each year.

[Unregistered]

I agree with Roland's conculsions except the expenses associated with rent income from a controlled corporation. I believe all expenses associated with the rental property are not deductible when a related shareholder rents "home/residential space" to their corporation. I don't remember but I think that was a part of code 280?