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EIC and Corp Return Questions

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    EIC and Corp Return Questions

    I could sure use some help/input. This is a follow-up to an earlier post I made about a liquidating a Corporation.

    A new client is a Columbian immigrant. He was granted political asylum in late December, 2005 and was trained as a civil engineer in Columbia. He was unable to obtain a SS card for several months. Nobody would hire him. He was offered a short-term computer consulting situation, if he was incorporated. As such, he formed a C Corporation on 2/23/06 using an online service. He did not make a capital contribution. He opened a Corporate checking account, and deposited his $5625 of revenues. He purchased an $850 used car in the Corporation's name (I've seen the title). He purchased a computer for $628 using a credit card linked to the Corporate Account. He had drafts taken out of his Corporate account for insurance on the car. In total, withdrawals were made on the account for about $5400. He has not been able to provide cancelled checks or explanations of the nature of the withdrawals other than indicating he used the cash for both personal and business expenses.
    He informed me his Corporate business ended about mid-April.

    It doesn't end there. He presented a handwritten 1099-Misc indicating from a restaurant. When asked what type of subcontractor services he provided, he indicated he was a busboy in 2006, and is now a waiter. We discussed employee vs subcontractor issues, and social security WH, and tips. He seemed to be aware that the employer should be treating him as an employee, but indicated he couldn't afford to lose his job by complaining. His wife and children joined him in the US in mid-April. He provided SS cards for each. There's more...he told me both his wife & he cleaned houses for a cleaning service and they won't issue 1099's. He told me his earnings were $1760 and his wife's $997.

    I decided first to look at the EIC on his personal return while I'm trying to figure out what in the world to do with his Corporate return. He also wants to liquidate the Corporation. His EIC after SE taxes will still be about $2800.

    This is probably the craziest situation I've dealt with. My client's typically aren't the EIC type. I'm kinda "suspicious". But...he seems "honest". It just seems like employer's have taken advantage of him. I've seen copies of each SS card, his driver's license, and called the restaurant to verify he "worked" there as a waiter.

    I could sure use some advice on this one. I'd like to help this guy, but both the Corporate return and personal return have me a little "skittish"(especially the Corporate).

    Any suggestions provided would be greatly appreciated.

    Post Note: Geesh! I just realized if I just take all of the expenses out of the corporation and assume the withdrawals were all personal, the increase in EIC will probably offset the Corporate tax.
    Last edited by Zee; 03-05-2007, 04:57 PM. Reason: Post Note

    #2
    increase EIC

    >>if I just take all of the expenses out of the corporation and assume the withdrawals were all personal, the increase in EIC will probably offset the Corporate tax<<

    You can't increase EIC by ignoring business expenses to increase net earnings, even if the income is laundered through a corporation. Besides, C-corp withdrawals are dividends, not SE income.

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      #3
      Originally posted by jainen View Post
      >>if I just take all of the expenses out of the corporation and assume the withdrawals were all personal, the increase in EIC will probably offset the Corporate tax<<


      You can't increase EIC by ignoring business expenses to increase net earnings, even if the income is laundered through a corporation. Besides, C-corp withdrawals are dividends, not SE income.
      Of course not. But, in this situation, it appears that the expenditures are almost all personal in nature and not business-related. The client had only one customer, and the auto he purchased in the name of the Corporation, and the business use would have been nominal. He used the auto to commute back & forth to his customer for two months (about 5 miles each way). The only other asset purchased, a computer, was also used for both business and personal with only two months of business usage. I don't think school supplies, clothing, groceries and many of the other items will qualify as a business expense (LOL). At this point, I am wondering...what's the benefit of recording the auto and computer as a Corporate expense? He wants to liquidate the Corporation. Why make that more difficult? The client is already in a zero personal income tax situation. He worked from his home. But, won't benefit from any employee business or home office deduction.


      Oops! You're correct. I added the post-note hastily without enough thought. Of course, dividends aren't earned income. But, wages are. The withdrawals from the business should have been properly treated as wages. I suppose I could prepare a W2 and pay the withholding and SS taxes in late. I'll have to look at the EIC tables, but my guess is it'd be a "wash" since Dividends aren't subject to SE tax.
      Last edited by Zee; 03-05-2007, 07:09 PM. Reason: moved paragraph

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