S-Corp Question

[Terry D EA]

Here is a situation that I am dealing with. I do apologize upfront if this post gets lengthy but it may be necessary.

Client is a single S-Corp shareholder that is a production company. All production has stopped as of November 2012. The only source of income is from the sale of the assets. Those funds are being used to repay debts and outstanding loans. So far for 2013, a total of 65,000 has been realized from the sale of the assets. There is a loan balance due the shareholder approximately 35K as well. Some of the loan repayments are going to the shareholder at this time. The company bookkeeper is questioning the need for the shareholder to remain an employee of this company. I can't tell at this time what the bottom line will look like to see if there is any profit or loss at the end of the year.

1. Can the shareholder only take a loan repayment that would indeed not be subject to payroll tax without throwing up a red flag for a shareholder not being on the payroll? BTW- there is no other payroll at all. The bookkeeper is contracted and does meet all of the requirements to be considered a sub contractor and not an employee.

2. Thinking of the ordering rules, can the shareholder do this?

3. Total owed to the shareholder has been reduced by the amount of loss claimed and resulted in a tax refund. Is this correct as well?

Logically, there is not income to this S-Corp from any production activities, no inventory left and it makes no sense to have the shareholder on the payroll. The only thing the shareholder is doing is obtaining buyers for the assets. The sale of these assets will at the end of the year, result in a taxable gain but again, it is not income from income producing activities. Am I thinking right that there should be no problem with not having this shareholder listed as an employee and subject to employment taxes.

Help me out here please.

[Lee B]

If he took a reasonable salary in prior years, I wouldn't have a problem with taking him off payroll.

[Terry D EA]

Yes, a reasonable salary has been taken since 1998 when the company was formed. The company has been profitable over the years with the last few going down hill. The shareholder elected to reduce her salary in an attempt to help save the company. I don't see a problem with removing her from the payroll and I agree with you but still want others to chime in here with some responses to my other questions in the original post. Thanks!

[jainen]

>>The only thing the shareholder is doing is obtaining buyers for the assets.<<

You can probably get away with it if the corporation dissolves, but as a corporate officer with a material role in the dissolution she should continue to take a reasonable salary. Okay, less than it was during production. May we assume the 35K was a bona fide loan and not some variation of deferred compensation?

[Terry D EA]

<<<May we assume the 35K was a bona fide loan and not some variation of deferred compensation?>>>

Yes, you may assume this and indeed it was a loan. The loans from the shareholder are recorded properly on the books. I have discovered a few adjustments needed for some recording errors but nothing of any significance. I think the end result is the corp will dissolve. After speaking with her today, she did make comments to that fact. Also, Jainen, by obtaining buyers for the assets she is just advertising them and selling them off. I guess this can still be considered material participation. Your response is the same conversation I had with this shareholder last December when the bottom fell out. Now her bookkeeper is trying to argue the point of the payroll tax issue among other things. The bookkeeper should stick to keeping books.

[OldJack]

_{Sounds like the client might want to file form 966 for liquidation and pay no more payroll.}

[kcjenkins]

At WORST, a 'reasonable' salary would be very little. But I like Jack's idea too.