A couple of follow-up points:
- If you are not getting clear answers from your tax professional, then you need to make a change.
- In your example of working zero hours, there is no salary issue as you did not work so it is a moot point.
- For the years that you took what you deem a reasonable salary, then there should be no exposure. However, for the years in which you made $15,000 and did not take a salary, then you have exposure.
- Based on your facts, I would say taking a $900,000 distribution would (could) be a red flag. The reason is the K-1 isn't generating the kind of $$ that would seem to justify a distribution such as this. However, to address your specific question, as long as your distribution does not exceed your basis, there is no tax impact.
- There are benefits in using an S corporation, but that is not a discussion for a forum such as this. Additionally, there are most likely legal liability benefits to using an S corporation. Also not a discussion for a forum such as this.
- If you close the S corporation and just use a Schedule C for your sole proprietorship, all of your earnings will be subject to social security when you pay self-employment tax. Using an S corporation, one only needs to take a "reasonable" salary. This is subjective, especially since you appear to be the only shareholder and generating all the earnings.
- Find a tax professional who will take the time to help you understand what you have and if this is the right entity structure for you based on your facts.
*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.
