S Corporation Audits Coming Soon

[Luis Mopeo]

Not to mention no section 179 deduction due to the business income limitation.

[Golden Rocket]

Consistency

Ah yes... consistency.

But consistent with what? Should the same guidelines exist to define "reasonable" salaries for S corps and C corps alike? Can we hold the IRS feet to the fire for minimizing C corp salaries then reversing themselves when maximizing S corp salaries?

Theoretically, yes. It would be sweet recompense to do this -- and we all agree it couldn't happen to nicer people.

But let's look at the facts. Not by researching the 5,000 or the 80,000 but look at your own clientele. I've got about a dozen of these entities, and some of you have many more than this. When you have a C Corp with unexpected profit, and the President gets a bonus, it is not unusual for his stated salary to virtually double. A typical $5 MM C corp may have $150,000 for a stated salary, but jump another $100,000 with a bonus for an "outstanding" year. And let's not kid ourselves -- outstanding years bring with them outstanding tax brackets, and the potential for much-feared "double-dipping." All of us know very clearly what this "bonus" strategy is and why. The IRS can put a glass eye in a blind platypus and see through this.

What about our S corps? I encounter big time resistance from my customers when I want them to pay themselves over $50K. These are engineers, architects, contractors, etc. who would not DREAM of working for someone else for $50K.

So, lest we forge unto our profession a master strategy of beating up the IRS auditors under the banner of "consistency," we're going to have to enter this battle with some measure of consistency ourselves. C Corp owners with fat $300K salaries and S Corp owners unwilling to make over $50K is hardly the stuff consistency is made of.

[Bees Knees]

IRS never squawks when a C corp pays a $30,000 bonus on a $50,000 salary. Court cases are always about a guy pulling $100K salary, and then all of a sudden he pays himself a half million bonus in a profitable year.

I think there can be consistency between C corps and S corps when you simply look at the comparable wages an employee makes doing similar work. If an auto mechanic makes $50K as a manager employee, then $50K ought to be reasonable in both the C corp and S corp world. Its when you try to bump it up to $500K in a C corp, or down to $10K in an S corp that your going to run into problems.

[Golden Rocket]

Salary.com

...this is arguably the most complete and detailed such website for occupational and professional salaries by geographical regions.

TTB has seen fit to provide the link. Click onto "links" then "general" and salary.com will appear on their list. I would not hesitate to use this salary for the type work performed by an S corporate officer. It has long been theorized that the non-salary portion of S corp earnings can be considered a return on investment, and I don't think the IRS has invaded that domain. At least not yet.

[JON]

Bees

what earns the profits is the main issue. Once you use salary.com or other surveys and no one figure will apply to you exactly. The agent then looks, especially in small business, who or what made the money. You bet an investment in equipment, software counts. If you make investments without the anticipation of profiting by it, I will show you a business that 9 out of ten times will not have profits. We are talking only small businesses here.

The majority of the 2003 audits were S Corps showing no or very little salaries. That will be who they go after again. I doubt if you will ever see the IRS challenging $70,000 stockholder's salary and trying to change it to $90,000, even it he has a UTI that is substantial. This all started because Congress asked for it. They thought regulations should change. If the 2003 report has been submitted and they are not going change regulations, then my guess is the abuse of no or minimal salaries is all they will look for. If they have not been filing payroll tax returns, stockholder(s) only working, that is where the penalties and taxes become substantial.

If S Corp, one man operation, has a substantial deposit made the last week of the tax year, there is no requirement that salary check has to be cut at the same time to change its character of taxation to social security. If no or little salaries have been paid then you have the problem. Not I did not pay out most of the income as salaries.

They are going after the total abusers. IRS does not want to argue why did you not give yourself a bigger raise.