Hello,

I have a question regarding S-corp (one-shareholder). I created S-corp last year and paid $$$ for tax return, this year trying to do myself.

PY 1120S didn’t show any wages or distributions.
I only contributed minor funds ($200-300) and last year profit that flew through to our 1040 was 11K.

For current year it is my understanding that I need to show some wages, but I didn’t prep any W-2 and didn’t pay any related taxes (SS, fico, etc)

I made a withdrawal of 30K this year, can I report all 30K as a distribution? Will I have to pay additional tax since distribution exceeds the basis(which is 11K if I understand correctly).

If I need to show wages is it too late to do W-2? Since taxes should have been paid in FY2012?

Any help/advice appreciated. Sorry if questions are cumbersome just trying to figure it out myself.

“I only contributed minor funds ($200-300) and last year profit that flew through to our 1040 was 11K.For current year it is my understanding that I need to show some wages, but I didn’t prep any W-2 and didn’t pay any related taxes (SS, fico, etc).”========>UNLESS your Sc orp has profit, it doesn’t need to issue a W2 to you, an EE/SH;however, S corps(as long as it has taxable profit) must pay reasonable compensation to a shareholder-employee in return for services that the EE provides to the corp before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corp to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation. As an EE, your salary is subject to social security and Medicare taxes called FICA taxes. So, the idea is to pay yourself the lowest possible salary to minimize social security and Medicare taxes. However, net profit is not subject to social security and Medicare taxes. Net profit is subject to federal income taxes on 1040.And net profit increase your basis in AAA acct and your stock basis in the S corp. If you pay yourself too little, a red flag will be raised. If audited, the IRS will claim that part of the profit you took out of the business was really wages and therefore, should be subject to social security and Medicare taxes

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation." Your salary, reported on your W-2 is an expense that reduces the corporation profit reducing the amount on the Sch K-1 of 1120S so it only gets reported once; on your 1040 you report W-2 income on line #7
“I made a withdrawal of 30K this year, can I report all 30K as a distribution?”=======> I guess you need to pay tax on your capital gain by reporting Capital Gains from Excess Distribution S-Corp. A shareholder's basis in an S Corp refers to the amount of money a shareholder has contributed to the corp, or profits earned by the S corp plus any loans to the corporation. When a corp without accumulated earnings and profits (generally historic gains and losses) distributes money or property to a shareholder in excess of the shareholder's basis, the amount of the distribution in excess of basis is taxable to the shareholder as a sale of the corporation's stock, a capital gain. Assume that you make a $100 capital contribution to S Corp B. Subsequently, you makes a personally guaranteed loan of $50 to S Corp B and the S corp earned $1K of profits. Then, your basis in S Corp B is now $1,150. If S Corp B now makes a $1.6K distribution to you, $1,150 of the distribution will typically be non-taxable as return of capital; however, $450, the excess of the distribution over basis, is taxable to you as a capital gain and needs to be reported on From 8949/Sch D. The income and deductions from an S Corp is reported to you, the shareholder , via a form1120S SCh K-1. Your K-1 income is your distributive share of corporation profit. This form can be used by the shareholder to not only calculate the shareholder's taxable share of the S Corp's activities, but may also be used to track basis items, including non-deductible expenses such as certain meals and entertainment or officer life insurance costs.Sch 1120S K-1 does not track the entire basis of the shareholder, however, and you, the shareholder .may need to keep independent records.


“Will I have to pay additional tax since distribution exceeds the basis(which is 11K if I understand correctly). “============>Yes you need to pay capital gain tax on it as said above( As long as distribution exceeds your stock basis in the S corp). Distributions in excess of basis is considered "Sale of stock" by the IRS reportable on Sch D/From 8949. There are no "capital gains" from this transaction inside the S Corp to report as a "capital gain distribution".
“If I need to show wages is it too late to do W-2? Since taxes should have been paid in FY2012?”==========>Yes I guess so ; as you can see, According to the Social Security Administration, ERs must have all W-2 forms postmarked by January 31 for each EE, for use for individual taxes. The only requirement is that they are postmarked by that date. Employees can expect to receive them in the mail within two weeks, roughly by February 14. Companies are required to submit Copy A of the W-2 forms to the Social Security Administration by the end of February--the 28th or 29th, depending on leap year--for any money earned the year prior, according to the Social Security Administration. However, if you file electronically, the deadline is extended until March 31. ALSO, you need to report your salary on W2 on 1040 line 7 on your 2012 return(As said as long as your S corp had taxable profit so that it could pay you reasonable salary)

Thank you very much for such detailed answer.
I have few follow ups. So in CY profit was about 40K so i'd think 30 K of distributions would not be subject to capital gains, is that right? since profit increases the basis if i understood correctly.

Since it is too late to do W-2, what do i do? should i just report 30K as distribution? since i can't do wages. Last year my accountant showed $0 wages and i assumed this is the way to go but based on response i need to show some wages. Regardless, since it is too late to do W-2, i need to show 30K as distribution? but then i most likely to get audited?

I have a full time job, and this smth i did on a side, if it helps, i'm a full time physician, but served rehab center on the side and insurance reimbursements flew through this S corp, it was more of a hassle then i made profit so i'm closing it down this year as soon as i get fully paid by medicare.

So the question is how do i show 30K that i took out from S corp on 1120S?

thank you!

I have few follow ups. So in CY profit was about 40K so i'd think 30 K of distributions would not be subject to capital gains, is that right? since profit increases the basis if i understood correctly.”==========>It depends on the situation; your distribution is TAXED as capital gain and you need to report it on form 8949/SCh D on your return if(AS LONG AS) it EXCEEDS your outside basis; your basis in an S corp has several important tax effects. Profit or loss of your S corp is applied to your personal tax return on 1040/ state return. Distribution to you, a shareholder, from theS corp is not taxable. Only profit is taxable on 1040/ your state return, whether it’s distributed or not. NOTE: But a distribution is TAXED if it EXCEEDS your basis, AAA basis or stock basis, in the S corp. A shareholder has a stock basis and a debt basis. The initial stock basis is the amount of equity capital supplied by the shareholder. The initial debt basis is the amount of money loaned by the shareholder to the S corp. Sch K-1 is received annually, reporting all components affecting shareholder basis. Firsdt you need to record your beginning stock basis. And add your share of every type of taxable income and non-taxable income. Also add your increases in capital contributions.Subtract any distributions of cash or property you received from your S corp. Also subtract any repayment of capital you receive and your share of the S corp’s non-deductible expenses.Then, you need to reduce basis by your share of deductible expenses that are passed through to you. These items affect shareholders directly rather than applying to S corp income.Apply to the debt basis, if you have, any amount that reduces stock basis below zero.For debt basis, you need to list your beginning amount personally loaned to the S corp.Subtract any loan repayment received from the S corp.And, add any new amounts loaned to the S corp. You also need to apply any negative amount of stock basis. Do not reduce shareholder basis below zero.SO, it is the S corp's responsibility to issue a Form 1120S Sch K-1 to the owners of the corp. It is your responsibility to track your individual stock and debt basis. All information for computing the S corp owners' basis is on Form 1120S Sch K-1. An owner's , your, basis in an S corp helps determine how much tax the owner owes for the period. You must keep up-to-date information on their basis each year.




“Since it is too late to do W-2, what do i do? should i just report 30K as distribution? since i can't do wages. Last year my accountant showed $0 wages and i assumed this is the way to go but based on response i need to show some wages.”=======>You may report $30K as distribution and I fyou get audited by the IRS then you need to pay penalty and FICA taxes(as said previously, distribution is NOT subject o tax; please READ BELOW).Since you, as shareholder-employee, receive both wages and profits from the S-Corp, there is a strong temptation to pay a lower salary and a higher profit distribution. Wages are subject to FICA payroll taxes. Between the S-Corp and the shareholder, wages are subject to a combined 13.3% payroll tax for 2012, plus the shareholder's income tax rate; so,the shareholder-employee will have a strong preference to pay herself a minimal salary and thereby increase the profit distribution.The IRS is fully aware of this situation, and they are actively seeking out S-Corps paying out below-average wages. The IRS has said over and over again that S-Corps must pay their shareholder-employees a "reasonable compensation" for services rendered to the company.
“ Regardless, since it is too late to do W-2, i need to show 30K as distribution? but then i most likely to get audited?”===========>I guess so. The number one audit risk for S-Corps is salary and wages paid to officers of the corp. The fastest way to get audited as an S-Corp is to file an 1120S with no amount showing on Form 1120S Line 7 Compensation of Officers.It is assumed by the IRS that no one works for free, and so the IRS has said over and over again that officers of the corporation must receive wages (reported on line 7). As an owner-employee of the S-Corp, you must pay yourself a salary, and pay payroll taxes on your salary, even if the business is losing money(however, unless you have profit, you actually do not need to issue a W2). You don't have to pay yourself a high salary, but it must be a "reasonable amount" according to the IRS. Reasonableness can be interpreted in different ways. You need to keep track of the number of hours you work for your business, and then figure out a "reasonable" salary to pay yourself based on the amount of time you spend. If you pay yourself nothing despite your profit from S corp, a red flag will be raised. If audited, the IRS will claim that part of the profit you took out of the business was really wages and therefore, should be subject to social security and Medicare taxes; the IRS can collect payroll taxes on officer compensation, and the penalty for failing to pay payroll taxes is 100% of the taxes owed. S-Corps will avoid this payroll tax penalty by paying shareholder-employees a reasonable compensation. I guess you need to contact the IRS for more info in detail( I am NOT an IRS auditor/examiner).
“So the question is how do i show 30K that i took out from S corp on 1120S?”==========>As said, as long as it exceeds your outside basis in the S c orp, you need to report it as capital gain(LTCG as long as you held it for more than one year) on Sch D/Form 8949;On the contrary, UNLESS it exceeds your outside basis, it is return of capital, and is NOT subject to capital gain tax.However, as said, it’d reduce your inside/outside basis in the S corp.

ALSO, NOTE: Knowing your cost basis in the S corp is a vital issue; However, to many such shareholders, basis is not understood and not known. Part of the confusion arises from the fact that S corps, MMLLC’s, and partnerships are faced with two different basis numbers – inside basis and outside basis. Both are important, but the outside basis is more likely to become an issue annually for the shareholder. Shareholders may not deduct losses from the corporation in excess of their outside basis.Your inside basis is basically the balance in the owner’s capital account on Sch L of 1120S. It represents the ownership interest in the corp, but not necessarily what that ownership interest cost. Inside basis is maintained on the corp books. It represents: the original amount credited on the corp books for stock purchases. Frequently, this will equal the amount invested, but it can vary when the interest is purchased from another shareholder and not from the corp.It increases in the investment in the corporation through an owner’s share of the profits.Decreases in the investment in the corporation through distributions to an owner.Additional stock purchases in the corporation’s stock by an owner ALSO increases your inside basis. Outside basis is more complicated, as it takes in a number of additional factors and must be maintained byyou, the shareholder. The corp does not normally track outside basis. Unfortunately, many S corp shareholders do not keep a record of their outside basis. Outside basis includes: The original purchase price;basis in any property contributed to the business. This is the lower of FMVor cost of property contributed to the corp;Taxable gains that are recognized on the contribution of property;Liabilities of the corporation assumed by the shareholder;Tax-exempt income of the business.
Outside basis is decreased by: Liabilities that the business assumes.Business and capital losses.Non-deductible business expenses (that are not capital items).Section 179;The corporation’s basis in property received from the business;Cash withdrawals.For example, If a shareholder agrees to be responsible for a debt of the corp, outside basis is increased by that amount. Conversely, if the corp agrees to pay a debt of the shareholder, the liability is assumed by the corp and decreases outside basis. Basis may not be reduced below zero. Therefore, losses in excess of basis are not deductible. These may be suspended for use in future use when basis has been restored. The losses maintain their character (i.e. an ordinary loss carries forward as an ordinary loss). Failure to maintain your record of outside basis can result in you deducting losses on the 1040 that are not allowable. If an IRS audit ensues, additional tax may be levied in addition to interest and penalties. This could create some undue hardships is if you cannot demonstrate the amount of basis simply because of poor record-keeping. The result could be the IRS assigning a basis on what you can prove, which would likely be grossly understated. Another problem with basis can be encountered occurs when there is a stepped-up outside basis. This frequently occurs when the shares in a corp are inherited from a prior owner. For example, assume that A is the founder and sole shareholder of ATech, Inc. He began the company with an investment of $10K. The company prospered and was very profitable. Joe unexpectedly dies in 2009. The stock in SmithTech, Inc. is valued at $100K. His heirs receive a stepped-up basis of $100K in the corporation’s stock. The heirs are approached by an outside investor who offers to purchase the assets of the corp for $100K. Assuming they accept the offer, there are some significant tax consequences. The corp has sold the assets that have an inside basis of $10K for $100K. This results in a gain on the sale of assets of $90K income taxable to the shareholders. They stand to lose the benefit of the stepped-up basis in the stock, and will pay taxes on the $90K gain. In order to benefit from the stepped up basis, they must liquidate the corp in the same year as the sale of the assets. They can recognize a loss on the liquidation that will offset the gain on the sale of the assets. If they do not liquidate the corporation in the year of the asset sale, the loss on liquidation of the corporation is a capital loss, deductible at the rate of $3K per year. One solution would be to sell the corporation, rather than the assets

thank you. i feel like i needed to get a degree in taxes before i opened S corp.

My S corp is very simple and i didn't inherited it from anyone neither did i pay for any stock. So i'd think my inside and outside basis is the same, there was no non-taxable expenses/income, etc.

I started with maybe $300 that i paid to create S corp and that's about it.
Is that really rare that inside and outside basis are different?

Last year (1st year of S corp) S corp had ~10K of profit which was not distributed, this year ~30K of profit and i took out $30K (distribution). So i think i don't need form 8949, do I?

Also, want to clarify wages. As an officer/president of S corp, i really did not contribute any services but as i physician i did took care of patients in rehabilitation center, do i need to pay myself salary for that?

thank you
hopefully it will be my last question

“My S corp is very simple and i didn't inherited it from anyone neither did i pay for any stock.”=====>I know that; inherited thing is just for a reference
“ So i'd think my inside and outside basis is the same, there was no non-taxable expenses/income, etc.”======>Possibly;as said, your inside tax basis is the initial investment ,i.e., cash or the value( FMV) of some other asset or etc plus profits minus loses minus distributions. Outside basis is what the tax rules say an owner/SH share has cost. Outside basis is effected by what the tax rules say the investment in the S corp is worth. Outside basis begins with the basis of your original investment plus profits minus loses minus distributions.
“I started with maybe $300 that i paid to create S corp and that's about it.Is that really rare that inside and outside basis are different?”======>When I assume that there is no any pty or other assets invested/paid, Then your inside basis , $300+$10K, your profit, and your outside basis is also $300+$10K.

“Last year (1st year of S corp) S corp had ~10K of profit which was not distributed, this year ~30K of profit and i took out $30K (distribution). So i think i don't need form 8949, do I?”========> Then as said , as long as your basis ($40K in AAA) and $40,300 in your stock basis( and $0 in yoir debt basis), and $40,300>$30K, it is return o f capital so you do not need to file Sch D/8949;however, your basis in AAA is reduced to $10K;$40K-$30K and stockbasis bal is $10,300.

“Also, want to clarify wages. As an officer/president of S corp, i really did not contribute any services but as i physician i did took care of patients in rehabilitation center, do i need to pay myself salary for that?”========>Sorry I can’t determine if you need to pay yourself salary( as I do not accurately understand what your personal situation is). Basically, IRS Headliner Volume 32 from Dec 2002 states: 'An S Corp must pay reasonable compensation subject to employment taxes to shareholder-EEs in return for the services that the EE provides to the corporation, before a non-wage distributions may be made to that shareholder-employee.You need to pay yourself salary;however, if there is NO officer compensation, then that line on the 1120S MUST be zero. The IRS is looking at these lines and are starting to audit the return. To put something there when there is none, is a big mistake.Asyou, the owner/officer ,do not physically work in the business, you have no problem with a zero salary. When you are working in the business, then you need to pay appropriatly. Look at the hours they work and wages paid to others. They certainly should not be the lowest paid employee of the business. The amount of the wages need to fit that facts (hours worked, going rate, ect..).It's clear that the IRS is analyzing the situation in which the S-corp is prepared to distribute funds to an owner-EE, and the IRS is saying before profits can be distributed, the S-corp must first determine to what extend any of those funds represent compensation for services rendered as anEE. when you neexd to pay yorself salary, Never let the salary be less than the distribution. I guess you, as said, need to contact the IRS for more info in detail on the issue.