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emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 2766
Experience:  IRS licensed Enrolled Agent and tax instructor
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I got a notice personal 2013 return from IRS taxes owed. It

Customer Question

Hello, I got a notice for my personal 2013 return from IRS for back taxes owed.
It pertains to K1 that was given to me by my S-corporation, IRS is calculating the tax
on the income earned by the S-corporation instead of the actual disbursement (cash) that
I received from my corporation.
Please help me understand what I can do to address this issue.
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

That's actually correct. S-Corp unlike regular corporation is pass-through entity. It means that the corporate profit is not taxed on corporate return but is pass to shareholders, just like in partnership or sole proprietorship. With a regular corporation (C corporation) the profit is taxed first at corporate level and than only the amount distributed to shareholder is taxed on shareholders return. With SCorp the entire profit is taxed on shareholder's tax return and the corporate return is only informational. There's no tax on 1120S.

Expert:  emc011075 replied 1 year ago.

Here's IRS publication: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

Any questions?

Expert:  emc011075 replied 1 year ago.

I see you read my respond. Do you have any question? Is there anything else I can help you with today?

Customer: replied 1 year ago.
Hello,
My idea with the partial cash disbursement was to use the remaining money for investment purposes within
the business. How can I fix the issue?, can I have the "investment amount" deducted on the K1 and resubmit a revised K1?
Expert:  emc011075 replied 1 year ago.

"investment amount" or retained earnings are only allowed in C corporation where the earnings are taxed as corporate profit. With a throughput entity the entire profit is taxed on shareholder's tax return, regardless how much he took out and how much he kept for future expenses.

Expert:  emc011075 replied 1 year ago.

Scorporation is a unique form of corporation. A profit is ALWAYS taxed as income somewhere, regardless what you do with it. Money used for expansion by large corporation are previously taxed profits that were not distributed to shareholders but kept in corporation. With Scorp you don't have the option to tax the profit as corporate profit. You have to report it on your individual return.

Expert:  emc011075 replied 1 year ago.

Do you have any questions? Is there anything else I can help you with today? I see you offline now. So if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. You find the rating bar on the top of the page – 5 stars. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.

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