Hi, I’m a 25% shareholder in a family business ( new to S corp) and we have $200,000 in profit for the year. The 75% shareholder put off distributions this year and is planning on making up for it next year. We each have around $50,000 in as salary. Neither of us will likely be taking any distributions this year though I think we should. If I understand right we will still be taxed on the profits? Also I was under the impression there were less taxes if profits were paid out as distributions vs wages? If we don’t take distributions this year we’ll we be able to “make up” for it next year without affect our tax bracket?

Thanks

#1;Correct; an S-Corp's profit is calculated by subtracting interest expenses and taxes from EBIT. Since an S-Corp is not taxed at the federal level, taxes to be subtracted consist of franchise taxes imposed by the state in which the S-Corp is incorporated. The profit calculated is income to the shareholders and will be reported on the shareholders' personal income tax returns in proportion to the shareholder's ownership percentage. S-Corp profits are taxed at the shareholders' personal income tax rates. S-Corp shareholders often take distributions from the corporation. These distributions are not taxed when taken by the shareholders, since the profit from the S-Corp has already been reported and taxed on the shareholders' personal income tax returns. It is imperative that shareholders take a salary in addition to distributions since the IRS recognizes the different tax treatment of salaries and distributions. Salaries are subject to FICA and withholding taxes. So S-Corp distributions are not subject to any tax.


NOTE:in the case of an S-Corp, net income reported per the tax return can be different from book income. The tax return may be reported on the cash basis of accounting while the books are maintained using the accrual basis of accounting. The main difference between the two methods is the inclusion of receivables and payables in the accrual basis method.




#2;Correct but not due to distributions as mentioned above but due to wages since wages (reported on your 1040 line #7 while your share of S corp profits is reported on line #17)reported on W2 decrease S corp profits reported on Sch K1 of 1120S and 1040. You need to use the K-1 form to complete the Sch E. All income shown on sch E is subject to ordinary income tax rate but is not subject to self employment tax or fica taxes. Because this income is subject to less taxation most S-Corp shareholders try to take low salaries and let as much of their income come from business profit as is reasonably possible.However, 'An S Corp must pay reasonable compensation to shareholder-employee(s) in return for the services that the employee provides to the corporation, before a non-wage distributions may be made to that shareholder-employee.




#3;Correct as mentioned above.However, as long as distributions exceed your basis in the S corp, then it’d be treated as LTCG taxed as 0%( if your tax rate is lower than 25%) or 15% (I your marginal tax rate is higher than 15%).

note;As an S corp, the accumulated excess earning tax doesn't apply because the earnings have already been taxed on your personal return on 1040. There are no dividends in an S corp, only distributions. Distributions are not taxable unless the distribution exceeds your basis as said previously.Giving yourself wages reduces the income of the corp, thus reducing your basis and increases your personal income and is subject to fica taxes.