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I have an LLC that has elected sub-S status in 2010. During

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2015, my S-Corp made money...
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: 1 year ago.Category: Tax
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4/22/2016
Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
Mark Anderson
Mark Anderson, Tax Attorney
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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
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
Here is some more info:http://www.lawmg.net/articles/determining-%E2%80%9Creasonable-compensation%E2%80%9D-s-corporation
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Customer reply replied 1 year 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 reply replied 1 year ago
How long can I expect to wait for the answers to my question? If you need a little time, that's OK
Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
You will be taxed on the income whether you take it out or not. You can leave it in the company.
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year 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.
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Customer reply replied 1 year 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?
Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
No. Well just leave it in the company.
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Customer reply replied 1 year 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?
Tax Professional: Mark Anderson, Tax Attorney replied 1 year 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.
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
Here is some information:http://www.journalofaccountancy.com/issues/2012/jan/20114319.html
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis
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Customer reply replied 1 year 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?
Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
Basis in increased by income. No. The income flows through to you on the k-1 so it would be 16k.
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
Basis is increased by income.
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
http://www.journalofaccountancy.com/issues/2012/jan/20114319.html
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year 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
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Customer reply replied 1 year 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?
Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
That is is true. Profit increases the basis.https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis
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Customer reply replied 1 year 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?
Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
Yes. Maybe you should hire an accountant.
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Tax Professional: Mark Anderson, Tax Attorney replied 1 year ago
If you think I answered your questions, then would please accept my answer. Thanks.
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Customer reply replied 1 year 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?"
Tax Professional: Lev, Tax Advisor replied 1 year ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,132
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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?
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Customer reply replied 1 year 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?
Tax Professional: Lev, Tax Advisor replied 1 year 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.
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Customer reply replied 1 year ago
So if the $16k profit is less than the basis, is it tax free to the shareholders?
Tax Professional: Lev, Tax Advisor replied 1 year 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.
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Customer reply replied 1 year 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?
Tax Professional: Lev, Tax Advisor replied 1 year 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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