Saturday, February 19, 2011

The IRS is watching "S" corporations

 

I have corporations versus "S" companies collected from several responses to my previous post on "C", that many active real estate investors prefer the status "S".  The reasons for the "S" status cited are flow through tax treatment, i.e., you have no separate taxable entity struggling and employment tax minimization.


For many entrepreneurs it's the second reason, the pique your interest.  The thrill of flight is 13.3% additional tax on the first $106,800 a result a tempting to treat, which is hard to ignore when it feels like every public body out for a piece of your earnings. (Note.) (All wages over 106 k 2.9% Medicare taxed.)  This is exactly what inspired Mr Watson 2002 and 2003 keeping salary at $24,000 and distributions of $175,000 be to take each year.


Like most strategies, everything out works until it is challenged and his condition is tested.  The IRS recently challenged Mr. Watson and District Court concluded that Mr salary to reclassify Watson's salary unduly low and allowed IRS to more than $134,000.  Mr. Watson costs about $48,000 in taxes, penalties and interest.


As a real estate investor could you questions, determining a fair wage?  Of course, each situation is different so the IRS fact sheet 2008 25 listed some factors, the courts considered issued, when reasonable compensation:

tax, corporation, salaryEducation and experience; Duties and responsibilities; Time and effort that dedicated business; Dividend history; Payments to non-shareholder employees; Timing and manner of payment of premiums to key persons; What comparable companies for similar services pay; Compensation agreements; and use a formula to determine compensation.

Many items on this list center around the amount of time and effort you devote to your business.  If you that real estate Corporation, are sole employee in your it reasonable is complete, your salary will be at the upper end of the spectrum.  A rule of thumb I tell that my customers is for a minimum factor on a 50/50 match on the first 110 k in revenue.


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