Yes, the money did essentially go to us for our use as the accountant said this is money taken out by us but not accounted for in business expenses so then it was placed in the "loans to shareholders" column.
Thank you for confirmation.
So, if the money was just taken out by us, why would we need to "still need to verify where the money went" if it is just going to be recategorized as wages?
No issues if that was a payment to you - and you plan to amend your tax return reporting that payment as either wages to officers or as distributions to shareholders.
Wages to officers would be deductible for S-corporation and taxable to recipients. But distributions to shareholders are maid out of shareholder's capital account - it will not be taxable but will reduce shareholder's basis. If the basis is reduced to zero - it is taxable as a capital gain.
And does that mean we need to do an amended tax return for 2012?
That is correct - if distribution to shareholders was incorrectly reported - to correct - you need to amend your tax return.
If so, do we indicate the amount added to the loan in 2012 of about $5K as our additional wages that year (that's how much the loan-line was increased by in 2012) or do we have to declare the whole 15K because the company is dissolving?
That is possible.
However - if the corporation is dissolved - all balance items must be zeroed - and the full amount which was not correctly reported should be paid off now - or will be treated as distribution.
Can't we just do the $5k this year, then adjust for the other $10K in the final tax return in 2013? Honestly, we can't go back and amend taxes for the last 15 or 20 years that this "loan to shareholders" thing has existed.
That is possible - but honestly - by doing this way - you cover one incorrect reporting by another incorrect reporting.
I know that many shareholders are doing this way - but legally that is not correct.
It seems to me that calling it wages solves all our problems (except adding taxes due) as there is no longer any "loan" outstanding for a creditor of the s-corp to try to collect on, and we should still qualify to file bankruptcy I think.
That is not "calling it wages" - these payments are actually wages - because they were paid to you as officers as a compensation for services - and you had no intention to pay it back.
But calling it a loan and listing the corporation as a creditor would see this debt discharged - which would also solve our problems and not involve additional taxes and refiling of returns. Our accountant insisted it is not a loan, just an accounting method and we have paid taxes on all income to the IRS so there is nothing we have to do with it.
Let be honest - if your accountant reported wages as loans and called that "an accounting method" - you might want to seek a different accountant. However for years you accepted that method to avoid employment taxes of wages.
The value of the stock is zero and the value of the corporation is zero. The accountant said 2 other attorney's she consulted thought the trustee was a nut/idiot and she has done many audits with clients and the IRS didn't bat an eye at the "loan to shareholders" accounting. Your thoughts?
If your basis in corporate stock is zero - any distribution to you as a shareholder (not as employees) must be reported and taxed as capital gains. When unsporting as distribution but hiding under "loan to shareholders" you avoided income tax liability for years building a pyramid scheme that may not last forever. I think that is a "creative" accounting practice - and the best resolution would be to include that amount into your income now. However if audited - that might be classified as a fraud with intention to avoid tax liability - all you might be assessed additional penalties for past years. That is the worst case scenario - and I hope you could avoid such development.
I would verity the contract you have with your accountant - if he/she could be held liable in this case.
Sorry if you expected differently..