By Tommy Brown
Due to increasing unemployment, more small businesses are forming than ever before. The S Corporation tax attributes are attractive to entrepreneurs, and are the fastest growing tax entity for many reasons. But they are also one of the most complicated tax entities and least understood by their owners/officers. In this article, I’ll list three common failures and three potential issues facing the owners/officers of S Corporations.
The first common failure is failure to elect status by the deadline of the 15th of the third month. S Corps should be set up by an attorney with the state and then the election is submitted to the Internal Revenue Service. This mistake is realized in the following tax year when owners bring their tax information to their tax preparer.
The second common failure is failure to keep minutes. Officers must meet at minimum once a year. Minutes of all meetings held by the officers should be maintained. Make sure the minutes include bank account information, S Corp election, loans to and from shareholders, compensations, distributions, and any other material matter.
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Another common failure is the failure to separate personal assets. The main reason to incorporate is to protect you personally from any negative events that may take place against your business. In order to keep that personal protection, you must set up and maintain a “corporate veil.’ Maintain separate bank accounts and keep them separate. Remember, the corporation is not to be used as a personal bank account. Conversely, be sure that items aren’t bought for the corporation from shareholder funds.
The first potential issue to keep in mind with S Corporations is shareholder loans. If you choose to make a loan from the corporation to a shareholder, the loan must be documented. Make sure to separate ‘Due From’ and ‘Due To’ figures. Also, the loans must bear interest and you should establish a payment plan.
Another potential issue is shareholder compensation. The corporation must pay an adequate and reasonable salary for any services provided by a shareholder-owner. These types of payments have to be paid before non-wage distributions are made to the individual, and of course those payments won’t be larger than any other amount received either directly or indirectly. Finally, anything a corporate officer receives in payment have to be considered wages as long as those distributions are reasonable payment for what the officer is doing.
One final potential issue of S Corporations is that of having an office in a home. This is a tax deduction available to shareholder employees, and it includes out of pocket expenses. But remember that this is to be taken on form 2106 of the schedule A and is not a schedule E item. This deduction is limited to 2% of the shareholder employee’s AGI, and all 2106 rules apply.
Remember that S Corporation taxes are a serious issue and not to be taken lightly. Please make sure to follow all tax laws applicable to your type of business. Consulting with an accountant or enrolled agent is always a smart thing to do. Don’t wait for trouble to happen before you get good advice.
About the Author: Tommy Brown, Enrolled Agent, provides
IRS tax help
for those with back taxes. Whether you need to get an offer in compromise, a tax settlement, or you need to end IRS liens or garnishment, go to
tommybrown-ea.com
to learn how to reduce your stress and stop the IRS. You can also sign up there for his free tax tips newsletter.
Source:
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