More S Corporations are undergoing intensive Audits

As an owner of an S Corporation, you should pay yourself a salary that is appropriate for your industry and position. If you do not pay yourself a market rate salary, and your firm is audited, you might be liable for additional back payroll taxes - plus penalties and interest . IRS revenue agents are beginning to audit more S Corporations and watching out for those firms that pay little or no salary to the owners to minimize payroll taxes. S Corporations are pass-through entities that issue K-1’s to all owners/shareholders at year end. Any net income or loss would pass through on a shareholders tax return as ordinary income not subject to self-employment taxes. If the S Corp tax return is examined by the IRS and they discover that the owners/shareholders were performing services for the S Corporation and did not take a reasonable salary, the IRS can reclassify ordinary income from the S Corporation and subject that to self-employment tax.

Be Prepared for an IRS challenge on Company Loans to Officers
(Tax Court Case lesson)

If you are an officer and plan to borrow money from your corporation, be sure to dot all your “I’s” and cross all your “T’s”. The loan needs to be handled like any other third party loan, including a promissory note and repayment schedule. The corporation should also pay the owner interest at the market rate. Interest due on the note can be recorded annually. There should be a clear paper trail that can answer any questions an IRS revenue agent may ask.Tax Court Case: A construction company owner borrowed money from his C Corporation to fund other business ventures. The company carried the advances on its books as loans, but the IRS slapped him with an $800,000 tax bill, claiming the advances were “constructive dividends”. However, in this case, the Tax Court sided with the owner, saying his promissory notes and extensive paperwork showed that he intended to repay this loan. (Byorick, TC Meme 88-252) Note: The most common situation that can result in a “constructive dividend” is when a corporation pays personal expenses of the shareholder. Constructive dividends occur most often with closely held corporations where dealings between the corporation and its shareholders are usually informal.

Tax Planning is a much too often overlooked strategy for reducing an individuals tax liability. For some folks - tax planning is not really needed due to their particular income situation. Those in lower income brackets that receive a W-2 at year end with no investments and no itemized deductions - don’t really have much to work with. But for others, especially high net worth individuals - effective tax planning is a must. Whether it is deferring income or accelerating expenses, it is always good to sit down with your tax accountant or financial advisor prior to the end of the year. If it is determined that taxes will be due - then the appropriate estimated tax payments can be made on time. This can avoid having penalties and interest tacked on to your tax bill after the fact. However, waiting until year end to do this is not a good idea. Tax Planning should be done much earlier in the year for maximum benefit.