S-Corp Real Estate Broker

[Terry D EA]

I have just picked up a new client who is a Real Estate Broker who is the sole shareholder of the Brokerage S-Corp. HRB completed the 1120-S last year and I have been asked to review it. Here are some things I am questioning.

1. The agents are paid strictly commission and are issued 1099 MISC for which I have no problem with as they are clearly not employees.

2. Line 18 employee benefit programs has been used to deduct "multiple listing service" and Line 19 includes the same amount in the total of other deductions with the same description on the attaching statement. This appears to be a double dip to me. How can you have an employee benefit program and no employees????

3. HRB has the pass through income/loss listed on Schedule E pg 2 as non-passive income. The broker does materially participate and is more than a 5% shareholder. Is this the right way to handle this? If the broker materially participates would he/she be an employee subject to withholding?

4. To add to my confusion, there are two different EIN's the EIN on the 2007 1099MISC is different than the EIN on the 1120-S. The company name is identical on both forms.

I need to know if I am missing something here or not completly understanding the tax treatment for Real Estate Brokers. I guess this would make perfect sense if the broker did not materially participate but the two different EIN's doesn't make any sense to me at all. Can someone point me to a reg or any infomation on the tax treatment of a Real Estate Broker.

Here is my other concern. I have leased office space in the office this Broker operates out of. It is a sweet deal but I want to be 100% sure of any comments that I make. Thanks in advance to anyone who can help.

Terry D.

[zeke]

Terry - You don't have nearly enough information. You may have two separate entities with the same name, or possibly a sole proprietorship that incorporated but kept the payroll under the old EIN. (OOPS!) Or several other scenarios come to mind. Gets lots of history and books & returns for YEARS back. Good luck!!

z

[PapaJoe]

Also, the broker, as a shareholder/employee of the S-Corp should be drawing a PAYCHECK from the company. There has been plenty of discussion on this board regarding S-Corp salaries.

[OldJack]

It would appear to me that this S-corp is not dealing with real estate in the sense of a passive activity so I would agree with the manner the profit is shown on the 1040 Sch-E. A licensed professional is allowed to provide professional services to an owned corporation and receive a 1099Misc for such services. Services provide to administer corporate activities should be as an employee reported on a W2, however, there is no requirement that a shareholder/officer must take a salary for such services. Of course, on IRS audit, other payments could be reclassified as salary so that is a risk the shareholder takes. It is not the responsibility of a current tax preparer to reclassify distributions to salary or to amend prior tax returns for prior decisions of this type.

[Terry D EA]

Thanks to all who replied. Old Jack, as usual, I am following your advice. I have found some additional information. As Zeke pointed out, HRB filed the 1099 MISC using the EIN when the company was a Sole Proprietor and should have used the new EIN issued for the S-Corp. My understanding is this has been corrected by HRB. I have had no intentions on amending this return regarding officer salary.

Old Jack, can you site an IRS reg or pub that justifies your statement of an officer not being required to administer services to the S-Corp when providing professional services? I just love these rats nests I get right at the beginning of tax season.

Terry D.

[OldJack]

Old Jack, can you site an IRS reg or pub that justifies your statement of an officer not being required to administer services to the S-Corp when providing professional services? I just love these rats nests I get right at the beginning of tax season.

I don't remember the court case where a lawyer/shareholder was allowed to be paid for legal fees as a deduction to the S-corp but a search could probably find it. You misunderstood my statement about administration of the S-corp... that would be services as an employee. The IRS can only "reclassify other payments" (after IRS audit) made to a shareholder employee if the shareholder has not received a reasonable compensation for employee services rendered. The IRS has no authority to demand any employee take a paycheck but they have authority to charge penalties after they reclassify other payments to the shareholder/officer. And, the best little tax book published (2008 Small Business Quickfinder Handbook) page D-8, quotes Reg. 31.3121(d)-1( b ) states an exception from reasonable wages for an officer who performs no, or minor, services.