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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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I have an LLC that has elected sub-S status in 2010. During

Customer Question

I have an LLC that has elected sub-S status in 2010. During 2015, my S-Corp made money for the first time - $16,000 approximately. I am the sole member of the LLC and sole owner of the S corp. I didn't take a salary because:
a) I didn't expect to make money
b) With $78,000 in sales and $16,000 in profit, there is no way I could pay myself "reasonable compensation," since "reasonable compensation" in the marketplace doing my job (everything) full time would exceed my gross sales.
Also, I didn't take any money out of the company in 2015.
Questions:
1) How should I fill out my return to minimize my chance of an audit and to survive an audit if it occurs?
2) Is there a way, since I didn't take out the 16K, to leave it in the company so that I don't have to realize the revenue? If so, how would I do this?
Submitted: 7 months ago.
Category: Tax
Expert:  Mark Anderson replied 7 months ago.
It is usually around 50%. It really depends upon your situation as what is a reasonable salaryhttp://www.forbes.com/sites/anthonynitti/2014/02/04/tax-geek-tuesday-reasonable-compensation-in-the-s-corporation-arena/#610b20f67a0b
Expert:  Mark Anderson replied 7 months ago.
Here is some more info:http://www.lawmg.net/articles/determining-%E2%80%9Creasonable-compensation%E2%80%9D-s-corporation
Customer: replied 7 months ago.
What aspects of my situation would apply to this? And it's no longer 2015. What consequences would there be both state and federal for counting half of that amount salary?Also, I didn't get an answer to the second part of my question. Is there a way to keep the $16k in the company? I didn't take the money out. Is there a way to roll it back in?If so, how would I do it?
Customer: replied 7 months ago.
How long can I expect to wait for the answers to my question? If you need a little time, that's OK
Expert:  Mark Anderson replied 7 months ago.
You will be taxed on the income whether you take it out or not. You can leave it in the company.
Expert:  Mark Anderson replied 7 months ago.
The point I was trying to make is that you could possibly pay half of the 16k out in reasonable salary. The IRS wants its taxes.
Customer: replied 7 months ago.
How would I take half of that as salary given that there is no longer enough cash in the company to write myself a check? Additionally, the company needs to money for operating capital. Another thought I had is that I've put nearly $70K into the company and have taken a fraction out. Is taking cash out that was less than my basis in the company considered income?
Expert:  Mark Anderson replied 7 months ago.
No. Well just leave it in the company.
Customer: replied 7 months ago.
Then how would I account for that on my return? Would my return show $0 profit? If so, what is the accounting technique I would use to show that the money came from the capital that I contributed to the company? What lines on my 1120S would be affected?
Expert:  Mark Anderson replied 7 months ago.
No your return would show the income and your share of the income on the k-1.https://www.irs.gov/pub/irs-pdf/f1120s.pdfYou just keep track of your basis.
Expert:  Mark Anderson replied 7 months ago.
Here is some information:http://www.journalofaccountancy.com/issues/2012/jan/20114319.html
Expert:  Mark Anderson replied 7 months ago.
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis
Customer: replied 7 months ago.
So, if over time, I put $70,000 into the company and this year the company made $16,000, my basis in the company is reduced to $54,000 and the income reported on my K-1 is $0?
Expert:  Mark Anderson replied 7 months ago.
Basis in increased by income. No. The income flows through to you on the k-1 so it would be 16k.
Expert:  Mark Anderson replied 7 months ago.
Basis is increased by income.
Expert:  Mark Anderson replied 7 months ago.
http://www.journalofaccountancy.com/issues/2012/jan/20114319.html
Expert:  Mark Anderson replied 7 months ago.
Basis adjustments are normally calculated at the end of the corporation’s taxable year. First, they are increased by income items; then decreased by distributions; and, finally, decreased by deduction and loss items. The order is important because, if basis is positive before distributions but would be negative if all deduction items were subtracted (however, again, basis cannot be negative), then the excess loss is suspended rather than the excess distributions being taxable. It should be pointed out that an S corporation shareholder’s basis in stock is reduced by current-year losses, regardless of whether the loss or deduction is disallowed under another rule, such as the passive loss rules.- See more at: http://www.journalofaccountancy.com/issues/2012/jan/20114319.html#sthash.gtc9WVfS.dpuf
Customer: replied 7 months ago.
I appreciate the links, but I'd appreciate it if you could tell me what all this means in plain English. I put $70,000 into the company since 2010. Each of the prior years, I had losses of varying amounts. So let's say I lost $5,000 in each of the years from 2010 to 2015. Does that mean I have $45,000 remaining in my shareholder's basis? Please confirm if that is or is not true.If it IS true, what happens to my basis when I have a profit? Does it further chip away at my basis or does it add to it? What would my bot***** *****ne be (the amount transferred to the K-1) if the company made $16,000 this year?
Expert:  Mark Anderson replied 7 months ago.
That is is true. Profit increases the basis.https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis
Customer: replied 7 months ago.
So, given my above simplistic example, what would my bot***** *****ne be (the amount transferred to the K-1) if the company made $16,000 this year?
Expert:  Mark Anderson replied 7 months ago.
Yes. Maybe you should hire an accountant.
Expert:  Mark Anderson replied 7 months ago.
If you think I answered your questions, then would please accept my answer. Thanks.
Customer: replied 7 months ago.
That wasn't an answer to my question. My question was "So, given my above simplistic example, what would my bot***** *****ne be (the amount transferred to the K-1) if the company made $16,000 this year?"
Expert:  Lev replied 7 months ago.
So, given my above simplistic example, what would my bot***** *****ne be (the amount transferred to the K-1) if the company made $16,000 this year?"As you might know S-corporation doesn't pay income tax.Instead all profit is passed to shareholders and reported on K1.So if S-corporation made a profit $16k and you are the only shareholder - THAT amount $16k is reported on K1 - and is included into your individual tax return.Questions?
Customer: replied 7 months ago.
So then what is the important of the basis? If I put $70k in, shouldn't I be able to take that amount out (less my deducted losses) without incurring tax?
Expert:  Lev replied 7 months ago.
That is correct.The amount of a shareholder's stock basis in the S corporation is very important. Unlike a C corporation, each year a shareholder's stock and/or debt basis of an S corporation increases or decreases based upon the S corporation's operations.If a shareholder receives a distribution from an S corporation, the distribution is tax-free to the extent it does not exceed the shareholder's stock basis.After the basis is reduced to zero - any additional distribution is taxed as capital gain.Since shareholder stock basis in an S Corporation changes every year, it must be computed every year.
Customer: replied 7 months ago.
So if the $16k profit is less than the basis, is it tax free to the shareholders?
Expert:  Lev replied 7 months ago.
So if the $16k profit is less than the basis, is it tax free to the shareholders?That is not correct interpretation.Profit is taxable income - it is reported on K1 and included into gross income on your individual income tax return.As you know - S-corporation pays NO income tax - correct?So all taxable income realized by the S-corporation - is passed to shareholders. That is regardless if distributed or not.
Customer: replied 7 months ago.
So then what's the difference between a distribution and taxable income? If $16k was less than my basis, wouldn't it make sense to distribute all of it tax free rather than pay taxes on profit?
Expert:  Lev replied 7 months ago.
Income is TAXABLE - so as long as income is constructively received - it is taxable.HOW income is used - that is a separate issue - you may want to distribute income to shareholders OR you might want to purchase a business asset Or invest into another business - that is not related to tax liability..Just to compare - when we receive wages - that amount is reported on W2 and is taxable.You may use wages to pay your rent or to make a gift to your parents or put into saving account - that makes NO difference - still you report wages on your individual tax return - form 1040.

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