S-Corp. distributions

 

You should know that your ability to use any losses that pass through from an S corporation to you personally depends on your basis in the S corporation's stock and debt. Basis is also important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation, and the corporation's income or loss.

Calculating the S corporation shareholder’s basis correctly is important because it measures the amount the shareholder can withdraw or receive from the S corporation as a distribution without realizing income or gain.

Often, the task of tracking basis is neglected because, when a profitable company makes only minimal distributions, the number simply doesn’t matter—until a major change happens, such as a change in the shareholder’s ownership or the end of the company’s life.

If the company has losses, they are allowed as a deduction on the shareholder or partner’s tax returns to the extent the individual has basis. Without basis, those losses are suspended/carried over to offset future income or basis. If basis is unknown or incorrect, a shareholder might incorrectly deduct losses he or she is not entitled to deduct.

A constant struggle between CPAs and their clients lies in distributions—or “over-distributions”, to be more accurate. When a shareholder or partner takes all the basis out (and then some), the excess is a taxable capital gain—often an unwelcome surprise to shareholders accustomed to receiving distributions tax-free. Distributions are an important and common reason for good basis calculations and good basis discussions with clients ahead of time.

If you have taken distributions in 2012 (or a planning to) it’s imperative that you have enough basis in your S-Corp. so that they are not re-characterized as taxable capital gains. I will be happy to sit down and review your basis and go over other S-corporation planning techniques.

Please give me a call to set up an appointment.

S-Corp reasonable compensation

As the owner of an S corporation, it is important that you take a reasonable salary for the work that you do. A big concern of the IRS is the issue of whether or not an S corporation pays reasonable compensation to its shareholders. Often, shareholders avoid paying a salary to avoid paying employment taxes. Instead, they take money out of the corporation as distributions. Filing an S corporation return that reports income but no salary is a red flag for the IRS and can trigger an audit.

Often, in these cases, the IRS recharacterizes a portion of the S corporation's net income as wages. Courts have held that an officer of an S corporation who performs substantial services for the corporation and who receives remuneration in any form for those services is considered an employee, whose wages are subject to federal employment taxes. An S corporation cannot avoid federal employment taxes by characterizing compensation paid to its shareholders as distributions of the corporation's net income, rather than wages. In such cases, the S shareholders must be treated as an employees and the distributions will be recharacterized as wages.

In order to head off an IRS audit, it is important for us to determine what would be a fair salary for you to take from the corporation. By appropriately documenting the amount we arrive at, we can defend against any attempted increase in compensation by the IRS should you ever be audited.

Will there be an AMT “patch” for 2012?

Without a change in the law, millions of taxpayers will incur AMT in 2012.

A special deduction called the AMT exemption amount protects most low- and middle-income taxpayers from paying AMT, but this number has not been permanently indexed for inflation. Instead, every year or two, Congress makes a temporary fix that has become known as the AMT patch. The most recent one covered 2010 and 2011. Both political parties agree on the need to prevent the AMT exemption amount from reverting to a lower level, but disagreement over the manner of doing this has made it difficult to enact the necessary legislation.

It is unlikely that Congress will wait until 2013 to extend the AMT patch, unless political gridlock prevented more expedient action. It is also likely that nothing will be done before the election in November. 

Election year taxes

It's an election year and that means that taxes are up for discussion. We've already seen big changes with the Supreme Court's ruling on the Affordable Healthcare Act.

Many issues still remain unresolved. Will another "patch" be placed on the Alternative Minimum Tax so that millions of Americans are not liable for the dreaded AMT? Will the Bush tax cuts that expire on Dec. 31 be extended? What is the likelihood that bonus depreciation will be extended for 2012 and beyond? The list goes on.

The outcome to these questions (and many more) will likely be determined by who wins the presidency in November. If you have any questions regarding 2012 tax issues please contact me. As always, I am happy to speak with you about them.

Tax aspects of the new health care lax

The US Supreme Court declared a mandate requiring US citizens and legal residents to maintain minimum essential health insurance coverage, to be a permissible exercise of Congress's taxing powers under the Constitution.

There were only four votes to uphold the requirement as valid under the Commerce Clause.  The majority opinion by Justice Roberts emphasized that folks who don’t want to purchase health insurance can avoid doing so simply by paying the fee imposed by section 5000A of the tax code, whose collection is enforced by the IRS.  Chief Justice Roberts pointed out that the fee may cost considerably less than purchasing a health insurance policy and that the fee is not applicable to people whose income is so low that they are not required to file income tax returns.

Although the individual mandate's "shared responsibility payment" in US Internal Revenue Code Sec. 5000A is labeled a penalty, not a tax, the Court held it is a tax for purposes of determining its constitutionality, and ultimately upheld it as a valid exercise of Congress's power to tax.

The Court held that the individual mandate was within Congress's power under the Constitution's Taxing Clause. The Court concluded that the individual mandate is not a legal command to buy insurance, but rather a tax on the choice to forgo buying insurance.

Outlook for S-Corps.

Democrats want to make upper-incomer owners of S-Corps. pay self-employment tax on their share of profits if 75% (or more) of the corps. gross income is attributable to the services of 3 or fewer shareholders.  This won’t pass in 2012 but will certainly be looked at in 2013 and beyond. 

Tax law writers are willing to accept tax increases that are used to reduce tax rates.  Congress is rumbling about changing the rules related to S-Corps and partnerships with gross receipts > $50 million.
Any changes would only be made as part of a larger overhaul to help lower corporate tax rates. 
This is bad news to the owners of small S corporations.

Stay tuned!!!

Tax & hockey go together...watch out!

Winger Eugeni Artukhin rejected Tampa's last offer and has signed on for more money in his native Russia. The same goes for Russian defenceman Denis Grebeshkov and Finnish winger Sean Bergenheim of the Islanders.  All three will earn more money this season playing for Lokomotiv Yaroslavl.

"In Russia the taxes are 13 per cent, so it's relatively speaking tax-free," explained [Mark] Gandler, whose firm International Sports Advisors has some 25 NHL players, half of them Russian. "They also usually have bonuses on top of everything, a free apartment, a free car, basically perks."