I had a return client come into my office the other day and he informed me that he recently incorporated, late 2005. No return has been filed for his S Corp for either tax year 2005 or 2006.
Anywho, that is the least of his problems. His former CPA apparently does not return phone calls so he wants to give me another try. I asked him if he paid himself a wage last year or the year prior, to which he said no. He then tells me that his CPA instructed him to pay his personal expenses out of the corporate account and not to worry about paying wages.
By personal expenses I mean: Primary Residence Mortgage, secondary residence mortgage, motorcycle insurance, all primary residence utilities, home owner's dues, home owner's insurance, and corvette lease payments. The corporation, obviously, does not own any of these assets. I know that you are supposed to treat personal expenses paid out of the corporation as distributions to the shareholder; distributions in excess of basis are capital gains. What do you think the IRS would say if I treated these personal expenses as commissions and report it as income on the schedule C?
I figure the IRS would have no gripe because he will be paying self employment tax on the earnings. Apart from giving this guy a wake up call, how should I treat this situation?
TIA
Anywho, that is the least of his problems. His former CPA apparently does not return phone calls so he wants to give me another try. I asked him if he paid himself a wage last year or the year prior, to which he said no. He then tells me that his CPA instructed him to pay his personal expenses out of the corporate account and not to worry about paying wages.
By personal expenses I mean: Primary Residence Mortgage, secondary residence mortgage, motorcycle insurance, all primary residence utilities, home owner's dues, home owner's insurance, and corvette lease payments. The corporation, obviously, does not own any of these assets. I know that you are supposed to treat personal expenses paid out of the corporation as distributions to the shareholder; distributions in excess of basis are capital gains. What do you think the IRS would say if I treated these personal expenses as commissions and report it as income on the schedule C?
I figure the IRS would have no gripe because he will be paying self employment tax on the earnings. Apart from giving this guy a wake up call, how should I treat this situation?
TIA
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