A few comments here based on your facts:
- If you aren't generating any income, it is doubtful that you are making any distributions either. The wage vs distribution is a hot topic for S corporations that are making $$ and instead of paying wages, subject to social security, the S corporation is making distributions which are not subject to social security tax.
- So keep this in mind going forward. You need to be able to show, if audited, that you are paying working shareholder's a reasonable wage and not just paying out distributions.. This is a hot issue for the IRS.
- The real issue here is how you treated the issuance of the shares of stock.
- Did this individual purchase them?
- If "yes" was a valuation done on the company to justify the purchase price as being FMV?
- If the shares were just "given" to this individual, then the FMV of the shares is compensation to this individual.
- If after reading the above you still believe that this individual was under compensated, then just make it up in 2019. Of course, this all depends on the earnings of the business and cash flow.
- Also keep in mind, that certain tax-free fringe benefits available to C corporation shareholder's will not be available to this individual since they are a more than 2% owner.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
