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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3031
Experience:  I've prepared all types of taxes since 1987.
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I am in the process of filing my 2012 1120 S corp return (on

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I am in the process of filing my 2012 1120 S corp return (on extension). I will have a profit on the S Corp return that will pass to me on Sch K that will cause me a tax liability on my personal 1040.
My question is that I need to pay the taxes from the Corp that generated the profit. What would be the least tax implication for me to take the funds out of the S Corp?
4 or 5 years ago I use to pay myself a distribution for this kind of expense and it did not cause any type of taxes to the Corp or me. However, I've been reading up on distribution and it seems the IRS is classifying them as wages and payroll taxes have to be paid on them. I'm a small S Corp with about 115 k gross recites, I paid myself a salary of 11k last year plus the S-Corp pays me 8 k each year in interest on a note from when I sold the sole proprietorship to the S-Corp many years ago (this was to convert to a Corp.) Would paying myself a distribution be a red flag that might cause an audit? Or is just paying myself wages the better way to go? Or if I pay a distribution and pay payroll taxes on it how do I report the payroll taxes? Do you have any other suggestions that would lessen the taxes. Since this is a 1120 for 2012 on extension could I just maker a tax payment from the Corp against the tax return and send it with the return and lessen the profit being reported to me on the K-1?

Thank you;
Dale
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.
Greetings,

As you mentioned the enforcement of the requirement for a reasonable salary has been increased in recent years. So, if you the salary you are getting is not the amount that you would pay someone to do the jobs you do for the corporation then just paying more salary may well be the better way to go.
Many of my clients pay a bonus, via payroll, in order to have the cash to pay income tax on the corporation profit that passes to them.
Payroll taxes are withheld and paid in the same as for your salary.

Once you are receiving a reasonable salary for the work performed it can be possible to get tax free distribution from the S corporation. Distributions are normal and not cause for an audit.

Making a tax payment from the corporation will not reduce the profit since the tax is an individual liability and not a business expense.
That payment for you would be a distribution to you, the shareholder.

Profit from the corporation is included in your income (by the K-1)whether or not the funds are distributed to you. Moving the money that represents the profit from the corporation account to your account does not change the amount of profit you report or your individual income tax due.

Even if you have already taken out all of the profit from the corporation this year it may still be possible to take out some of your capital (or investment) in the corporation. You can check your accounting or balance sheet (Schedule L) to see if there is capital contributions you can return to you tax free.

Unfortunately, it is too late to do much of anything that can reduce the net profit for the 2012 year since what that year is in the past. The one possibility is for the corporation to establish and fund a SEP-IRA but that has to be done by the extended due date.
See http://www.heschlaw.com/Article-Details.aspx?xid=19&cat=0
"Deductions for contributions to qualified pension plans are generally allowed for the tax year in which the contributions are paid. A special rule allows an employer to treat a contribution made on or before the due date of the employer’s tax return, including extensions as being made on the last day of the tax year for which the return is being filed. For example, an employer can extend his 2010 tax return and have until September 15, 2011 to fund the pension contribution and still be able to take the deduction on the 2010 tax return."
This does still apply for the 2012 tax return being funded by September 15,2013. the amount the corporation pays for your (and all other eligible employees) is a deduction that will reduce the profit you report on your tax return.

Please ask if you need more discussion or clarification.
Thank you.










Customer: replied 1 year ago.

Thank you for your answer. I'd like to ask a couple more thing to clear up something I may have misstated or maybe I'm not understanding your answer.


 


With regard to to S-Corp making a payment to the IRS for taxes and sending it in with the 1120S. I did not mean that would lessen the taxable profits. What I meant to ask was would this be an acceptable way for the S-Corp to pay the taxes directly? And then would I get a credit on my K-1 to apply as taxes already paid in? Is this a possible scenario?


If so where would I report the taxes paid in on the 1120S?


 


Your suggestion on the SEP IRA is good. I already have a 401 k setup for me in the S-Corp and I already made the employer and employee contributions for 2012. I wish I had contributed more, but it's to late now.


My question is; Can an S-Corp have a 401 K and an SEP IRA and can you contribute to both in one year?


 


Thank you in advance for your help on this.


Dale


 

Expert:  jgordosea replied 1 year ago.
Hello again,

"What I meant to ask was would this be an acceptable way for the S-Corp to pay the taxes directly? And then would I get a credit on my K-1 to apply as taxes already paid in? Is this a possible scenario?"
You can use the company funds to pay your individual tax but that will only show as a distribution to you on the K-1. On 1120-S it is on Schedule K line 16b and on the K-1 it is box 16 code D.
The credit is not on any line on your individual income tax; it will just be the balance paid (amount due) when you send the check with your individual return.

The company and not the employee makes the contribution to a SEP. An individual can participate in an employer's SEP-IRA and also a qualified 401k retirement plan in the same year. There are limits on the total amount that an employer and employee contribute to the employee’s retirement accounts.
It is possible to have both and contribute to both type of plans.
Unfortunately the employer can not begin a SEP plan if there is already another plan in place (such as 401(k)).

Hope that clarifies, please ask if you need more help. Sorry it does not seem there is anything to really change the prior year tax.

Thank you for the opportunity to be of service.
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3031
Experience: I've prepared all types of taxes since 1987.
jgordosea and 2 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

I have filed the S-Corp 1120 and need a little help on my personal 1040 regarding deferring income through a retirement account . Would it be possible to do this by phone? I need to explain 3 different types of income I need to deffer. I can pay you by the hour, please advise your hourly fee and a phone number to call.

Expert:  jgordosea replied 11 months ago.
Hello again,

Thank you for requesting me. If you post a question for me it may be arranged to speak by phone from a new question that is not yet accepted. A set amount of fee will be paid prior to the conversation along with the question amount.

Please include my name in your question and let me know when is a convenient time for you. I will be away until about 4pm EST today, Wednesday.



Customer: replied 11 months ago.

Mr jgordosea;


 


After doing some more research I'd like to try and explain the situation regarding my wanting to talk by phone about trying to defer some income to lower my personal tax liability on my 2012 1040 return. Perhaps after I explain this it may not be necessary to have a phone call to resolve my questions, but I'd like to leave that option open just in case.


 


Explanation / Situation:


I have a tax liability as it stands right now on my 2012 1040 (due Oct 15) of $2360.00


I'd like to lower this tax liability if possible as much as possible.


This liability is primarily caused by income we have to report from our K-1's that pass income to us from the Sub S Corp business we have. The profit / income doesn't actual come to us. It stays in the S-Corp. but we have to report the profits on our personal 1040 return.


My wife is also a partner in a Farm Partnership she inherited some years ago. The income from that partnership also stays in the partnership but we have to report it on our 1040 each year. That income is very small, I mention it only because of the strategies I'd like to suggest to lower our tax liability.


 


Our personal income comes to us in the following manner:


1.) My Wife is a school teacher with a salary.


2.) I receive a small salary from the S-Corp business


3.) We receive interest income from the S-Corp on a note that we setup years ago when we incorporated the S-Corp and sold the sole proprietorship to the S-Corp (This also causes a tax liability)


4.) I also have another small proprietorship business that has income. However this year it has a loss.



5.) My wife receives some royality payment for oil lease income approx. $1200.00 a year. This is reported to us via 1099 Misc but it goes on Sch E of the 1040


 


We both have retirement accounts. My Wife has a 401 k at work and I have a 401 k plan under the S-Corp. We also have personal individual IRA accounts.


 


I should have deferred more profit sharing into the S-Corp 401 k, but I didn't know at the time how much to put in because I was behind on the bookkeeping. We also missed contributing to our personal IRA for 2012. I though we had until the tax extension deadline (but I now know I was wrong).


 


I'd like your opinion as to whether we could open a SEP IRA either personally or under the small proprietorship business I have to make a contribution for 2012 since it could be opened by or before Oct 15th?


 


My tax program says the employer side of a SEP IRA can't make a contribution for 2012 because it has a loss this year. My question is can I make a personal deferral into a SEP IRA?


 


Or is it possible to use the interest income that comes to me from the S-Corp on a 1099 INT as an income bases to establish a SEP IRA?


 


Or is is possible to use the income that we have to report from the K-1's we receive from the S-Corp and the Farm partnership usable as income to setup a SEP IRA?


 


Or do you have any other suggestions on a way to lower the tax liability for 2012?


 


Thank you for taking the time to look at this.


Dale


 


 

Expert:  jgordosea replied 11 months ago.

Greetings,

 

You can open and fund a SEP-IRA prior to the extended due date.

 

You can set up a SEP for your self-employed business even if you participate in your corporation's retirement plan. The net profit of the self employment does limit the amount when figuring the maximum deductible contribution so there is none allowed when there is no self employment net profit.

See http://www.irs.gov/publications/p560/ch05.html

 

SEPs are funded by employer contributions only.

However, if you are permitted to make traditional IRA contributions you could have made that individual contribution to the SEP.

 

The answer to your questions are that you can set up a SEP-IRA for the sole proprietorship but the only contribution allowed would be the same individual retirement account contribution that is allowed to a traditional IRA (by the due date without extension) when there is no profit.

Only earned income is used to compute a traditional IRA contribution and there are limits when modified adjusted gross income is more than $92,000 but less than $112,000 for married filing jointly for 2012 and no allowed deduction over $112,000.

See http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2012--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work

 

Is it permitted to have a SEP and another plan in the corporation (you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.) There is likely not any advantage over just fully funding the 401(k) that you said you have for future years.

 

Unfortunately, there is nothing else to be done at this point in time that can change the amounts reported for 2012.

You were correct to consider SEP-IRA as the only item allowed up to the extended due date but based on the facts presented that will not change your amount due.

Sorry if this is not the answer that you would prefer, but you can consider looking at 2013 in October or November to project what needs to be done for this year based on your improved knowledge to not repeat the dilemma.

 

Thank you for the opportunity to be of service.

If you still wish to confer via phone a new question needs to be started.

 

Please write if you need more discussion or clarification.

Again, thank you.

Customer: replied 11 months ago.

Thanks for taking the time to explain all of this to me.


 


Was there anything we could do in the future to defer the K-1 profits from the S-Corp or Farm partnership income, or is it not considered earned income?


 


How much do I owe you for your time on this?


 


Thanks again, Dale


 


 

Expert:  jgordosea replied 11 months ago.

Hello again,

 

The pass through profit is ordinary income and not earned income.

 

Having your corporation pay more salary or wage may allow a larger 401(k) contribution that would reduce the profit (for the corporation deduction of salary) and net a lower total individual income as the retirement contribution is not included in your taxable wage (unless to a Roth).

 

Since the question is in the same thread that same price should be the fee when you rate my answer; but it is always at your discretion to add bonus or pay whatever amount that you decide is proper. For help with payment issues please use customer support at http://ww2.justanswer.com/help

 

If I can be of service in the future please include my name in the question to alert other experts to allow me to answer.

Thank you for the opportunity to be of service.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3031
Experience: I've prepared all types of taxes since 1987.
jgordosea and 2 other Tax Specialists are ready to help you

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