For Question 1: What is the IRS ruling and/or cases I can see online in similar cases?
Question 2: Is there any tax liability on this final "distribution"? Not taking into account income for the year which there was none, what would be the answer and/or how I can figure it out?
1) I'm trying to understand - if each year the S Corp filed a return and on my "salary" paid SE tax, the profit was already taxed as well, right?
So the profit + some money that should have been taken out of the account is still in the bank account. Let's say out of the $350,000, $100k was for salary that should have been pulled out in the year salary was received. The rest was taxed in the year income was earned and tax paid then on the income as if received as dividends (non salary part). $250,000 is left as profits already taxed. I had paid in $20,000 to start the business.
That leaves a $230,000 of after tax money in the company account.
How can this be taxed again? Can you show me an IRS link to show rates and why?
2) The links you showed me state that a S Corp has to pay a fair salary. I know that. My question is what cases state that a S Corp failure to file W2's for a sole owner but who paid SE tax has to go back and file the late W2s and fines for not filing the first time?
2) Paying a salary includes paying employment taxes. Both the employer and the employee are liable for employment taxes. Paying a salary requires filing W-2. The requirements and cases for employers that show that the employment taxes and W-2s must be done apply to the S corp.
The S Corp that has to pay a salary has to do what all employers with employees must do.
I am trying to understand what is meant by the S corp paid SE tax as SE tax is not part of a corporate return. That was why I mentioned needing to change the individual return as SE is only part of the 1040 and not part of the 1120S.
If the S corp deducted salary then the salary has to be included on the individual return and included in the income of the owner-employee. When it was deducted on the corporate return the salary reduced the profit reported by the corp on the K-1 so the salary has be taxed to the individual in addition to the K-1 profit declared as income (just as it would for any other employee).
If money was not taken from the corporate bank account then it seems that salary was not actually paid to you in that year. If a deduction was not taken for the salary then it should not later be created when there was no activity. If a deduction was not taken the amount paid is a distribution that is not added to shareholder income (unless or until it exceeds basis).
Rather than trying to create a transaction that did occur from money that stayed in the bank it may be more proper to recharacterize the distributions that were made to be salary.
Hope this clarifies for you, even though there is no method for a corp to pay SE tax.
Each year, the foreign earned income exclusion was taken for my income since I was out of the country. When going back and issuing the missing W2s, can this exclusion be taken even though the salary remained in the company account (apparently or at least a part of it)?
In case I have not yet overloaded you with information, during some reading I saw a case that includes references to the major cases cited by the courts in re-characterizing dividend distributions made by an S corporation to its sole shareholder as wages for FICA purposes.