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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2365
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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We have a new S Corp that has yet to make a profit in 2.5 years. I

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We have a new S Corp that has yet to make a profit in 2.5 years.
I have had to use personal funds throughout the year to pay certain business expenses that we didn't have the money to pay at the time. We totalled all this up and submitted to our accountant as a loan. About 8K.

Did we do this correctly? And would it best be paid back through a distribution? The accountant is saying that I should pay myself a salary before recouping my funds loaned since we have never made a profit and it looks suspicious. (we are on track to make a profit this year). To do this, I would have to loan the business more money to pay me a salary, which makes no sense.

Is there any way to use this loan as a personal deduction on my taxes as a business expense?

Anne :

Hi

Anne :

Thank you for requesting me

Anne :

While it is true that the IRS wants you to pay yourself a salary..........you're absolutely correct that the S Corp must first make a PROFIT before that can happen

Customer:

The EA that is doing our taxes says that this puts us at risk for audit since we are not making a profit or paying a salary... this has my business partner (and sister) very concerned.

Customer:

In addition, I have to be very careful about the amount of salary paid, as i am disabled and on SSDI. Wondering if we are better served an LLC partnership?

Customer:

With regard to the money loaned... is that in any way deductible for me?

Anne :

Loaning the S Corp $ just so you can draw a salary would not only be foolish, since you would wind up being taxed on the money twice (since you would have paid tax on the money when you received it) but you would also be subject to payroll taxes on any salary you draw from the S Corp

Anne :

Also, you should probably change the money that you have contributed to the S Corp from a "loan" (since, as with all loans, there needs to be a a written instrument for the repayment of the loan, including interest) to a draw of "Owner's Equity", meaning that the money you received was a return of your own investment, and is not taxable.

Anne :

I understand where your accountant is coming from though. IRS would like you to make a profit in 3 out of 5 years.........and in a perfect world,

Anne :

you would be able to do just that.

Anne :

However this is NOT a perfect world..........and truly, the IRS understand this.

Customer:

Thank you. These are all my thoughts exactly. I understand being conservative but...

Anne :

Since you stated that you are on track to make a profit this year........then you should be fine

Anne :

but you don't need to be taxed 2x on the same money and open yourself up to payroll taxes if the S Corp isn't able at this time to pay you

Customer:

Is there any weight in considering a conversion to an LLC partnership? I am merely a small business marketing consultant... no inventory or product sales.

Anne :

Do you have a partner?

Customer:

Yes. My sister and I are partners.

Customer:

As I said, I merely have to watch what my monthly income is as I am on SSDI disability. Its really a part-time venture for me.

Anne :

Did she just invest in the business, or does she actively work for the company?

Customer:

She handles the administrative and tax work for me... but I am the consultant

Anne :

let me check on thing.........

Customer:

The work ratio is probably 70/30... with me being the 70.

Anne :

In order to change from an S Corp to a Partnership, you would have to apply for a new EIN# XXXXX the IRS

Anne :

You would also have to liquidate the stock (that is probably only on paper)

Anne :

You might want to talk to your accountant and get his/her opinion on whether or not you should change, but the first thought that comes to my mind is that you would not have to pay yourself a salary, which means you would not have to hire someone to do your payroll (unless either you or your sister know how)

Anne :

Under the Partnership, both you and your sister would be considered "General Partners) and you would still have to pay SE tax, but nothing else

Anne :

No other payroll taxes

Customer:

Thats. Yes, that is what I was thinking, that it might be worth it to avoid the salary thing since my business is project based.

Customer:

Thank you for answering my questions. You rock Anne!!

Anne :

Thank you for asking for me!

Anne :

Its nice to know I can still rock at my age......lol

Customer:

I believe one can rock at any change. I'm just struggling being more the entrepeneur and risk taker in our business, with my sister being overly conservative and cautious. Its a good balance though-- keeps me in check! Your chat will help. Thanks so much.

Anne and other Tax Specialists are ready to help you
Thank you very much for requesting me, and for the excellent rating!

Please feel free to ask for me by name if I can help you in the future........

Also thank you for making my day by telling me I rock..........now if I could just my kids to believe that!

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