I will be starting a new entity as a libility shelter that will hold vehicles and employee's. Our current entity will subcontract the work to this new entity and the new entity will be just barely enough to cover its costs.

Regarding the vehicles it is most advantageous to take the standard mileage deduction. Because the actual vehicle expenses are less then the deduction we will accrue untaxed cash in the new entity. For this reason I am planning make the new entity an S-corp, so that we can withdraw that accrued cash tax free since we are only taxed on what is reported on our k-1 (I may be wrong in this thinking).

Since the S-corp will only make enough to cover its expense it will never be able to pay its shareholders a salary. Is it ok for an s-corp to never pay a salary? My research indicates that is ok, based on IRS FS-2008-25 and the line "The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly."

“Regarding the vehicles it is most advantageous to take the standard mileage deduction. Because the actual vehicle expenses are less then the deduction we will accrue untaxed cash in the new entity.”========>As you use vehicles(cars, SUVs and pickup trucks that are used for business activities)in your small business, how and when you deduct for the business use of those vehicles can have significant tax implications.. You may have a choice of standard mileage rate or actual expenses, but either way, the expenses can be deducted on the 1120S. Generally, the more economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you the bigger deduction. Conversely, the higher the operating costs, e.g., gas, repairs, tires, etc. the more beneficial the actual cost method is likely to be. Congress decided years ago that theTPs should not subsidize extravagant vehicles used by biz. To prevent that, the law squeezes otherwise allowable depreciation deductions for luxury cars. But don’t think Rolls Royce or Ferrari. Congress has a much less extravagant view of luxury. For 2012, the maximum first-year depreciation write-off for a new ,not used car, that costs over $15,300 is $11,160 with bonus depre/Sec 179 expensing. For a used car, the maximum first-year write-off for 2012 is a much lower $3,160. These figures assume 100% business use. The limit is higher for SUVs with loaded vehicle weights OVER 6K pounds. For such vehicles put into use in 2012, 50% of the cost can expensed using section-179 expensing, plus another 50% of the cost that wasn't expenses under section-179 for bonus depreciation, plus another 20% of the cost leftover for regular first-year depreciation. So for a new $50K heavy SUV put to use in 2012 and used 100% for business, $40K; $25K+$12.5K+$2.5K can usually be written off in 2012. The IRS is very fussy about writing off the cost of vehicles, so if you plan to take a vehicle deduction it's essential to keep a detailed log of your biz miles and other expenses if you want to write them off, too. This is one area that TPs receive extensive questions about and probably one of the most abused and one that the IRS loves to delve into.
“ For this reason I am planning make the new entity an S-corp, so that we can withdraw that accrued cash tax free since we are only taxed on what is reported on our k-1 (I may be wrong in this thinking).”=========> The IRS allows you to deduct the associated car expenses from your business income . Any deduction helps to decrease your taxable income and annual tax liability on 1120s/Sch K1 of 1120S. The tax treatment of auto expenses for S-corp SH/owner is based on whether the business or the SH/owner owns the vehicle. Auto expenses of S-corp shareholders are deductible by the S-corp when the vehicle is titled in the S-corp’s name. However, if the vehicle is titled in the name of the shareholder/owner the S-corp reimburses the SH/owner for a portion of his business-related automobile expenses. The S-corp takes an expense deduction for the reimbursement. Prior to allocating any expenses or reimbursements, the S-corp and SH/owner must verify the party that holds the vehicle title.As the biz made an election to file taxes as an S-Corp the biz would use form 1120s to report the expenses on line 14(do not report sec 179 exp deduction, you should report the exp on Sch K1 of 1120s box 11). If a car is owned by an EE/SH but the company pays the loan payments, the full amount of the loan payment/ exp reimbursements should be included in the EE's wages reported on line 8, as such payments aren't being made pursuant to an accountable plan. However, as long as the s-corp reimburses/loan pmts the EE in the future, it is deductible by the business and not taxable to the shareholder UNDER the an accountable plan.The amount is fully deductible, but should go on the wages line of the 1120S;the personal use portion is not deductible. It does not matter who, EE or S corp, owns the car. for an S Corp the personal use of a company owned vehicle should be treated as "wages" and part of the W-2 verus a shareholder distribution. Or, if the vehicle is in the name of the shareholder/EE, but the Corp pays 100% of the expenses, same answer, the personal use is treated as taxable wages on 1120S line 8.



“Since the S-corp will only make enough to cover its expense it will never be able to pay its shareholders a salary. Is it ok for an s-corp to never pay a salary? “=========>It depends; S corps can save significant sums by carefully setting shareholder-EE salary levels; an owner of an S-corp might wear two hats. One is as the owner/SH of the business, entitled to receive a share of the net profits of the business. Oftentimes, the owner/SH will also work for the business, and thus be an EE of the firm. Thus an owner/SH-EE of an S-corp can receive two different types of income: net profits or losses and salary income.It's clear that the IRS is analyzing the situation in which the S-corp is prepared to distribute funds to an owner/SH-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 an EE. The amount of salary you pay yourself is factor of many items. Certainly comparable salaries for for comparable work is the best indicator but may not be available. Your role may cross several lines. Besides work for clients you do administrative work for the corp. You may also do marketing. All these factors need to be taken into account. In addition, you are entitled to a reasonable return (distribution) on your investment in the corporation. Reasonable compensation must be paid, but the IRS has released guidance stating that there is no requirement to pay wages to an officer if there is no cash flow to owners from an s-corp. This most often occurs in a startup or unprofitable s-corp. You don't have to further the loss by paying wages if there is no other money coming out.
“My research indicates that is ok, based on IRS FS-2008-25 and the line "The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly”=============>Correct, however, as long as the S corp SH/owner provides services to the S corp, he /she must receive an adequate or reasonable amount of compensation for these services. The S corp may deduct the compensation expense and must pay the ER share of employment taxes: 6.2% Social Security tax and 1.45% Medicare tax. The shareholder-EE is responsible for 4.2% Social Security tax (in 2011 and 2012) and 1.45% Medicare tax. The S corp is also responsible for FUTA taxes. Minimizing these taxes provides an incentive to keep the S corp shareholder’s wages low and to characterize most of the passthrough income as distributions. (NOTE; SH/Owner who are officers of a corporation who do not perform any services or perform only minor services in that capacity and who do not receive or are not entitled to receive direct or indirect compensation are not considered EEs of the corp).So, S corps need to pay a "reasonable" salary to EE-shareholders, but this is typically not required in years that the corp posts a net loss. Hence, most S corps suspend owner salaries in loss years.

Wow thanks for the great reponse. I have some follow up. The following comments seem ambiguous.

"Reasonable compensation must be paid, but the IRS has released guidance stating that there is no requirement to pay wages to an officer if there is no cash flow to owners from an s-corp"


"Correct, however, as long as the S corp SH/owner provides services to the S corp, he /she must receive an adequate or reasonable amount of compensation for these services. The S corp may deduct the compensation expense and must pay the ER share of employment taxes: 6.2% Social Security tax and 1.45% Medicare tax. "

Keep in mind this s-corp is just going to be set up for legal liability protection. All the labor from another entity will be subcontracted to it. As the officers wont be performing the labor. My intent is for it to just barely break even -- not to take losses. So would there be a problem if the S-corp just has say $100 of profit year after year? Of course we would have to pay the payroll taxes on the $100

“Keep in mind this s-corp is just going to be set up for legal liability protection. All the labor from another entity will be subcontracted to it. As the officers wont be performing the labor. “===================>As mentioned above, reasonable salary" is just that; what is reasonable for your hours of work? The amount of salary you pay yourself is factor of many items. Certainly comparable salaries for for comparable work is the best indicator but may not be available. Your role may cross several lines. Besides work for clients you do administrative work for the corporation. You may also do investment/stock mkt annalyses activities or etc. All these factors need to be taken into account. In addition, you are entitled to a reasonable return (distribution) on your investment in the corporation. As long as the S corp is capital intensive, this would indicate a larger distribution than a service oriented business. Yu need to keep a log of all of your activitites on behalf of the corporation and pay a reasonable wage based on the total of these activities.

“My intent is for it to just barely break even -- not to take losses. So would there be a problem if the S-corp just has say $100 of profit year after year?”========>I guess it is beyond my opinion; however, it depends on the situation; earnings manipulation is usually not the result of an intentional fraud, but the culmination of a series of aggressive interpretations of the accounting rules and aggressive operating activities. The end result is misstatement of the financial results perpetrated by people. Accounting for earnings requires judgment, both from management and from their auditors. Management might calculate the timing of recognizing revenues and expenses to pump up net income. Management can also change accounting methods or estimates by disclosing these changes in the notes of their financial statement. For example, how a company recognizes depreciation or values inventory can affect earnings. As long as this is disclosed and signed off by the auditors, it is legal. Less scrupulous companies might create fraudulent reports or even fictitious transactions.