C-Corp comp to Officrs

[cientax]

Have a potential client that is sole owner of small C-Corp roofing contractor. He incorporated because someone in Florida told him he should incorporate and he did while he was there temporarily. No one advised him of what all was involved with incorporating and never paid himself salary or wages, just took draws. He incorporated in January 2007 in Florida but lives in Texas (no issue there). The problem is that he never paid wages or salary and no employment taxes withheld or paid, and question is, where do we include his income from the C-Corp to the Form 1040? Would we show it as wages and have him pay employment taxes late, do we show it as dividends on 1040 and file 1099DIV with no employment taxes, or line for Other Income on 1040? He filled out the Form 2553 to elect S-Corp but never filed it with IRS, (we already checked with IRS).

On the Form 1120, I except to report the profits as Compensation of Officers on line 12 and Sch-E Form 1120 line 4.

This is is my second potential client in the same week with the same issue. Any help or suggestions please!!!!!

This won't happen again in the future as long as he is incorporated and meeting with someone with at least some knowledge.

[PapaJoe]

If he was a sole proprietor before the Florida incorporation, you might consider ignoring the corporation for 2007 and file as a Schedule C. Then, with your expert advice, have him start using the corporation in 2008, paying a salary and filing payroll tax returns.

[cientax]

If he was a sole proprietor before the Florida incorporation, you might consider ignoring the corporation for 2007 and file as a Schedule C. Then, with your expert advice, have him start using the corporation in 2008, paying a salary and filing payroll tax returns.

We told him to continue using his copr name and number for 2008 but he has 1099's from 2007 being reported on 1099's to the C-Corp and IRS. We also plan to file the 2553 for S-Corp election once this year is completed and filed if he comes back.

[BulldogTom]

How much income is going to be reported? How much were his "draws"? Can he take the tax hit by showing no salary, and including the dividend "draws" into income?

When did he begin his business? Is it possible he did not start really begin the business in Fla until later in the year and can go with a fiscal year? If so, he could then make a payroll check out and pay back the loans from the corporation.

Is it possible that he can have a corp in FL and a sole proprietorship in Texas and report them separately and the corp loaned some money to the proprietor? There could be some notes executed that would include the interest that is to be paid as a balloon at the end of the 18-24 month term of the note.

Way to many questions, not enough info to really get a good answer. There are possibilities to minimize the taxes. It just takes a little working through.

Tom

Lodi, CA

[cientax]

How much income is going to be reported? How much were his "draws"? Can he take the tax hit by showing no salary, and including the dividend "draws" into income?

When did he begin his business? Is it possible he did not start really begin the business in Fla until later in the year and can go with a fiscal year? If so, he could then make a payroll check out and pay back the loans from the corporation.

Is it possible that he can have a corp in FL and a sole proprietorship in Texas and report them separately and the corp loaned some money to the proprietor? There could be some notes executed that would include the interest that is to be paid as a balloon at the end of the 18-24 month term of the note.

Way to many questions, not enough info to really get a good answer. There are possibilities to minimize the taxes. It just takes a little working through.

Tom

Lodi, CA

He incorpateted in January 2007 and received payments in May and Auugst from the same contactor for work perform but never receiced a 1099MISC from this contractor, only a printout from their quicbooks progrm showing the payments made to him in 2007. The other company issued a 1099MISC with the corp name. We could probably use the income from the contactor that did not issue a 1099 as sole proprietor on Sch-C Form 1040 but his expenses would be minimal.

If we show it as losn to shareholder, where would we then show is repayments if there were none, and no contract to show that the corp loaned the sole prop the money?

I think I'll just crunch some numbers with both 1040 and 1120 and see what we can come up with to better suit the tax situation.

Thanks for the info.

[Bart]

Have a potential client that is sole owner of small C-Corp roofing contractor. He incorporated because someone in Florida told him he should incorporate and he did while he was there temporarily. No one advised him of what all was involved with incorporating and never paid himself salary or wages, just took draws. He incorporated in January 2007 in Florida but lives in Texas (no issue there). The problem is that he never paid wages or salary and no employment taxes withheld or paid, and question is, where do we include his income from the C-Corp to the Form 1040? Would we show it as wages and have him pay employment taxes late, do we show it as dividends on 1040 and file 1099DIV with no employment taxes, or line for Other Income on 1040? He filled out the Form 2553 to elect S-Corp but never filed it with IRS, (we already checked with IRS).

On the Form 1120, I except to report the profits as Compensation of Officers on line 12 and Sch-E Form 1120 line 4.

This is is my second potential client in the same week with the same issue. Any help or suggestions please!!!!!

This won't happen again in the future as long as he is incorporated and meeting with someone with at least some knowledge.

Using Rev. Proc. 2003-43 you could ask to be an S-Corp since inception then all his draws could really be draws.

[kcjenkins]

I would recommend that the corp become an S Corp for 2007, since that is how he actually operated anyway. And under the new rules, it's not too late for a retroactive election.

[OldJack]

I reluctantly agree with KC. Reluctantly because this stupid guy should have to pay for his ignorance. If the IRS refuses to grant S-corp status there is no choice but to report the income as taxable in the C-corp and treat the distributions as taxable dividends (ye old double tax). A loan for this case of taking out all the profits as received is not going to fly and nether is going back and claiming payroll with payroll tax penalties. I hope you charge him a fee at your double rate.

[JohnH]

For most situations where the shareholder earns less than $95K and the C-corp has moderate earnings, the double tax is no big deal.

After all, the taxpayer and corp would pay a combined 15% in Social Security (withholding plus matching tax) on the salary, so the 15% corp tax on the dividends is pretty close to a wash. If the dividends are qualifying dividends, the total tax bite on the personal income can actully be less than if it were paid in salary. Of course, if there is state income tax that also has to be taken into account and the person won't get earnings credit for SocSec. But in the final analysis just reporting it as a C-corp and reporting the payments as dividends might be not more costly than jumping through any sort of hoops.

I'm not recommending this on an ongoing basis, but it might just be the easiest, most cost-effective way to handle year 1 and it most clearly reflects what actually happened. Sometimes we get into a tizzy over double taxation when it really isn't a huge issue from a net financial standpoint.