How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lane Your Own Question
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11356
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
1929974
Type Your Tax Question Here...
Lane is online now
A new question is answered every 9 seconds

I have a bit of a complicated situation. I opened an s corp

Customer Question

I have a bit of a complicated situation. I opened an s corp in 2012 for a service business (realtor) and earned appx $250k for 2012/2013. . The $250k has stayed in my business bank account and I have not taken any out or paid myself wages/distributions. I'm in the process of doing my 2012 taxes now and just want to get everything corrected. I have overpaid/applied refunds to 2012 year so should not owe
Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
Is there any way of retro paying myself from the s corp to include in 2012/2013? Also, I called the IRS and they have no record of the funds or s corp but it was created and I do have an EIN.
Expert:  Lane replied 1 year ago.

Hi - I can help here

...

I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security & Medicare, estate, corporate & tax advice since 1986.

Customer: replied 1 year ago.
ok, great
Expert:  Lane replied 1 year ago.

What you'll need to do is prepare the 1120-S, prepare the W-2 and pay yourself a reasonable salary, and then have the rest flow through the K-1 to you as an individual

Expert:  Lane replied 1 year ago.

Have you prepared your personal return for those years?

Customer: replied 1 year ago.
I'm in the process of doing my 2012 right now but was not sure if I can complete the 1120s and k-1 retroactively
Customer: replied 1 year ago.
I understand the process of the 1120s and k-1 but since the funds have sat in my business account untouched I don't know how to handle at this point
Expert:  Lane replied 1 year ago.

Yes, you can and should ... after a period (typically three years) unless you've dissolved the corp and filed a final 1120-S they hiot you with non-filing penalty (regardless of income)

Expert:  Lane replied 1 year ago.

Hang with me here and let my give you a bit of foundation

Customer: replied 1 year ago.
basically I would like to account for the $250k on my 2012 and 2013 taxes so would pay maybe $80k a year in wages for each and the remaining $45k in distributions
Expert:  Lane replied 1 year ago.

The S-Corp is a pass through (you likely know this) and the profits after your wage and the other s-corp expenses flow to you on a K-1

Expert:  Lane replied 1 year ago.

Makes a lot of sense, very reasonable

Customer: replied 1 year ago.
the s corp has not been renewed since 2014 is that an issue?
Customer: replied 1 year ago.
was obviously active for 2012 and 2013 the years I will pay out
Expert:  Lane replied 1 year ago.

You can buy prior year copies of Turbotax here... that might make this much easier: https://turbotax.intuit.com/personal-taxes/past-years-products/

...

No, again until you file that 1120-S with the final return box they'll expect filings

Customer: replied 1 year ago.
since I will have to pay myself wages with a w-2 and did not do payroll those years will I be penalized?
Expert:  Lane replied 1 year ago.

let me estimate that for you... you'll have to bear with me a minute

Customer: replied 1 year ago.
I have home and business turbotax for those years, will that work?
Expert:  Lane replied 1 year ago.

perfect, yes

Expert:  Lane replied 1 year ago.

OK, on the wages, I used 85000, filing as single standard deduction generates a tax liability of 14,469 ... Total penalty and interest for non-filing and nonpayment is $21,876.06

Expert:  Lane replied 1 year ago.

that's 2012

Customer: replied 1 year ago.
$7,000 penalty?
Customer: replied 1 year ago.
they have money applied towards 2012
so I will probably not owe on the tax liability
Customer: replied 1 year ago.
would that penalty remain the same?
Expert:  Lane replied 1 year ago.

1,322.00 of interest on the tax, taking it to $15,791.00,

...

$3,255.53 failure to file $297.45 interest totaling $3,552.98

...

Failure to pay 2532,08 ... totaling $21,876.06

Expert:  Lane replied 1 year ago.

no it changes ... do you have an estimate of tax liability?

Customer: replied 1 year ago.
I have paid appx $14k for 2012 which should be enough to cover wages/distributions tax after my deductions
Customer: replied 1 year ago.
since I have 3 years to file if they have enough money to cover the tax liability would I still owe the failure to file?
Expert:  Lane replied 1 year ago.

Yes, but something they will waive under something called FTA (First Time Abatement) if you ave a clean compliance history for the previous three years or POTENTIALLY under reasonable casue

Customer: replied 1 year ago.
at this point I should file an 1120s and k-1 for 2012 and 2013 with the $80k wages/ $45k distribution
when entering into turbotax I enter the $80 in the w-2 section and note that nothing was withheld for state taxes etc?
the k-1 is the distribution? I see that section in turbotax
will turbotax calculate the penalty etc?
my biggest issue was if I was able to pay myself the funds retroactively with the 1120s/k-1 from the scorp but it sounds like that will be ok
Expert:  Lane replied 1 year ago.

[sometimes]

...

Taxpayers can request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three ways, depending on their situation:

  • Before the IRS assesses a penalty, the taxpayer can file a penalty nonassertion request with a paper return to request that the IRS not automatically assess a penalty.
  • After the IRS has assessed a penalty, the taxpayer can request penalty abatement, typically by writing a penalty abatement letter or by calling the IRS. Tax professionals can also request abatement using IRS e-services.
  • After the taxpayer has paid the penalty, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement. 6 The taxpayer must file the claim within three years of the return due date or filing date, or within two years of the date the penalty was paid.
Expert:  Lane replied 1 year ago.

sorry looks like we crossed there let me read

Expert:  Lane replied 1 year ago.

Yes, it's the profit that matters ... the dollars became taxable once you have the kind of profit you had ... the physical distribution of them isn't a taxable event

Expert:  Lane replied 1 year ago.

What you're doing now is going back and reporting it (in tax terminology, getting into compliance)

Customer: replied 1 year ago.
turbotax will be able to figure out the details once I enter it in?
just put the wages in the w-2 section and don't put any withholdings in?
k-1 is distributions and I just put those in the k-1 section?
Customer: replied 1 year ago.
will the s corp faces penalties for not filing those forms or paying payroll taxes?
Expert:  Lane replied 1 year ago.

The K-1 can SHOW distributions but you didn't have any ... What the K1 WILL shopw that's taxable is line 1 income

....

The 1120-S has gross receipts (your commissions, whatever) then expenses (your wages, automobile, business meals and entertainment, advertising, etc) that THAT number that's left is what gets taxed to you on the K-1 (flows to the front of the 1040)

Expert:  Lane replied 1 year ago.

Yep

Expert:  Lane replied 1 year ago.

hang on and I'll estimate those for 2012

Customer: replied 1 year ago.
how do I account for distributions? I can't do those retro? If I have $250k in the account and want it paid out for 2012 and 2013 via wages and distributions is that not possible?
Expert:  Lane replied 1 year ago.

Failure to file 2340 (AND remember we didn't include the 45000 that would flow to you on the first estimate of personal taxes,

Expert:  Lane replied 1 year ago.

distributions are not taxable events

Customer: replied 1 year ago.
aren't they taxed at regular rates as opposed to self employment rate?
Expert:  Lane replied 1 year ago.

the tax is based on (1) Wages and (2) profits (over and above the wages and other expenses)

Expert:  Lane replied 1 year ago.

to tax the distributions of profit in a pass through after they've already been taxed at the K-1 level would be taxing then twice

Customer: replied 1 year ago.
ok, so the k-1 just shows the amount over and beyond the wages- I don't have to classify it as a distribution
Expert:  Lane replied 1 year ago.

That's right, it's essentially a dividend (called distributive share of profits)

Expert:  Lane replied 1 year ago.

One o the biggest problems out there with S-Corps and investors (not shareholder employees) is when they have to pay tax on their portion of profits from a K-1 but the controlling owners don't distribute them any money to pay the taxes WITH

Customer: replied 1 year ago.
this is just me and the intent was to avoid some SE tax
Customer: replied 1 year ago.
what do you anticipate the s corp penalty to be and what do you think my chances of getting an abatement on the scorp as well as the individual fines?
Expert:  Lane replied 1 year ago.

Understand ... was just trying to help you understand how it works ... the distributions only lower your tax BASIS but are not taxable

Expert:  Lane replied 1 year ago.

And not paying Social Security and medicare taxes (not PAID on that K-1 share) is exactly the reason FOR the required salary

Expert:  Lane replied 1 year ago.

It's very possible if you are clean (as described above) ... but would only apply to the first year

Customer: replied 1 year ago.
the funds on the k-1 (appx $45k) would not be taxed at SE tax rate, correct?
Expert:  Lane replied 1 year ago.

that's right ... it's the 1/2 that you withdraw and pay from wages and the matching 1/2 that the S-Corp (you, here) pays that's analogous to Self-employmentn tax for a self-employed individual (a very specific tern in taxation)

Customer: replied 1 year ago.
when I fill out the 1120s how do I note that I did not withhold any fees for the wages?
Customer: replied 1 year ago.
those will then be paid on my individual return, correct? when I enter in the w-2 on my turbotax with no withholdings they will calculate?
Expert:  Lane replied 1 year ago.

Just don't show the withholding and yes there will be tax and then with no withholding against it the tax is not reduced by the withholding

Customer: replied 1 year ago.
basically just show gross sales and wages paid on the form
Expert:  Lane replied 1 year ago.

If I were you I'd use all ofnthe deduction that would be available to you ... in Real estate it's COMPLETELY expected that you'd have expenses (auto, lunches, maybe an office rent, advertising, etc) to reduce that 45,000

...

Could actually get it down low enough that you culd take the salary down and still have it seen as reasonable

Customer: replied 1 year ago.
post those deductions on the 1120s as opposed to my personal tax form?
Customer: replied 1 year ago.
normally I post those deductions in my turbotax bussines expenses
Expert:  Lane replied 1 year ago.

Yes, those are expenses of the company ... here's what the expense section of the 1120-S looks like

Expert:  Lane replied 1 year ago.

Compensation of officers (see instructions—attach Form 1125-E) . . . . . . . . . . 7 8 Salaries and wages (less employment credits) . . . . . . . . . . . . . . . . 8 9 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . 9 10 Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 11 Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . 12 13 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14 Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562) . . . . 14 15 Depletion (Do not deduct oil and gas depletion.) . . . . . . . . . . . . . . . 15 16 Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17 Pension, profit-sharing, etc., plans . . . . . . . . . . . . . . . . . . . . 17 18 Employee benefit programs . . . . . . . . . . . . . . . . . . . . . . 18 19 Other deductions (attach statement) . . . . . . . . . . . . . . . . . . . 19 20 Total deductions. Add lines 7 through 19

Customer: replied 1 year ago.
what is considered reasonable for salary on $125k? I have seen 50/50 or 60/40 as a base line?
Expert:  Lane replied 1 year ago.

sorry, the formatting didn't transfer well ... but as you can see you're expected to have expenses ... You could always use form 2016 UNreimbursed employee expenses, but that would be contrived (making it harder than simply showing the expenses of your S-Corp)

Expert:  Lane replied 1 year ago.

LOTS of theories (rules of thumb) out there on that one ... IRS won't speak to it and say that it's a "facts and circumstances" question ... essentially you should look at whast you would be paid to do the same thing as an employee

Customer: replied 1 year ago.
also, this might make it a bit more confusing but I was paid about $40k as a 1099 from another company
Customer: replied 1 year ago.
I did have some expense for that earned income, I assume I would write those deductions off in my personal forms?
Expert:  Lane replied 1 year ago.

That's a part of your S-Corps gross receipts ... OR if they gave you the 1099 based on your social and in your name ... then you'll report that on schedule C

Expert:  Lane replied 1 year ago.

Expense for that will go on the Shedule C ... or, again if the 1099 was to your S-Corp (not likely, there's an exception for 1099s to corporations) in the S-Corpexpenses

Expert:  Lane replied 1 year ago.

Would you like to do a phone consult ... LOTS of stuff here ... we're getting close, but a call would likely be much more efficient ... We can do what's called an "additional services offer" here where we're give a private/encrypted link to exchange phone and/or email ... I can do this for a small amount (say $9) BUTb would need to wait until about 3:00 I have another call scheduled for 2:15 (eastern time here)

Customer: replied 1 year ago.
do you have an estimate on my s corp fines? how can I see an estimate when I'm going through the process of completing this? when I submit the taxes should I not pay it and ask for the abatement at that time?
Expert:  Lane replied 1 year ago.

OK I've answered both of these ... since the S-Corp doesn't PAY taxes there's just the non-filing fee ... it was something like 2300 for the 2012

...

Adn on the other one:

...

axpayers can request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three ways, depending on their situation:

  • Before the IRS assesses a penalty, the taxpayer can file a penalty nonassertion request with a paper return to request that the IRS not automatically assess a penalty.
  • After the IRS has assessed a penalty, the taxpayer can request penalty abatement, typically by writing a penalty abatement letter or by calling the IRS. Tax professionals can also request abatement using IRS e-services.
  • After the taxpayer has paid the penalty, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement. 6 The taxpayer must file the claim within three years of the return due date or filing date, or within two years of the date the penalty was paid.
Expert:  Lane replied 1 year ago.

2340

Expert:  Lane replied 1 year ago.

And on what your turbotax will do I'm not sure how sophisticated it is (I use an intuit professional program with my clients)

Expert:  Lane replied 1 year ago.

Listen ...I'd be glad to continue here OR do the phone consult ... but will need to step away for a bit for 2:15 conference call

Expert:  Lane replied 1 year ago.

If this HAS helped, and you DON’T have other questions … I'd really appreciate a positive rating (using the rating request, faces, or stars on your screen)

...

That's the only way I'll be credited for the work here.

...

But we can also pick back up on this a little later (either way)

Expert:  Lane replied 1 year ago.

still with me?

Expert:  Lane replied 1 year ago.

Hi,

...

I’m just checking back in to see how things are going.

...

Did my answer help?

...

Let me know…

...

Thanks

Lane

Related Tax Questions