topic Section 199a - Salary Considerations in State tax filing

Section 199a - Salary Considerations

troy1 — Tue, 04 Jun 2019 19:12:54 GMT

Under Section 199a under the Tax Cut and Jobs Act of 2017, does it make sense for pass-through service entities, such as S-Corporations, to have the owners maximize their salary to take advantage of the 20% deduction for qualified business income? The relevant entities are service corporations (they do not sell a product).

This is a forum for Turbotax users. TT is not licensed fo...

SweetieJean — Tue, 04 Jun 2019 19:12:55 GMT

This is a forum for Turbotax users. TT is not licensed for use by paid tax preparers.

NO... you MUST take a reasonable salary ... the IRS wil...

Critter — Tue, 04 Jun 2019 19:12:57 GMT

NO... you MUST take a reasonable salary ... the IRS will be watching for salary reductions and can hit you hard with penalties ...

The IRS position is that an S-Corporation MUST pay a reasonable compensation to an officer before non-wage distributions may be made. The reason is that they feel that non-wage distributions when no wages are paid is an avoidance of social security taxes. From the IRS website at http://www.irs.gov/businesses/small/article/0,,id=203100,00.html :

"Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense and subject to employment taxes."

The page cites Joly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000) as one judicial finding on the IRS's authority to reclassify distributions to wages subject to employment taxes. Factors to determine reasonable compensation are given in the ruling.

The AICPA has an interesting article on this topic here: http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

You also might want to read a lively discussion on the Tax Almanac website here: http://www.taxalmanac.org/index.php/Discussion_Forum_-_Tax_Questions . The substance of the discussion seems to be that taking a reasonable salary is not optional and, if you took distributions with no salary, the distributions should be changed to salary with appropriate employment tax returns being filed (late, if necessary.)

The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return.

Much appreciated! However, I was considering the notion t...

troy1 — Tue, 04 Jun 2019 19:12:58 GMT

Much appreciated! However, I was considering the notion that since the deduction is limited to 50% of wages, you may want to increase your salary (within reasonable limits) to take advantage of this deduction

The IRS would love for all S-corp owners to increase thei...

Critter — Tue, 04 Jun 2019 19:13:00 GMT

The IRS would love for all S-corp owners to increase their wages to 100% of the profits ... go ahead.

Thing #8: High Income Taxpayers Need Employees or Propert...

Critter — Tue, 04 Jun 2019 19:13:01 GMT

Thing #8: High Income Taxpayers Need Employees or Property

The law requires high-income taxpayers to either pay wages or hold depreciable property in order to get the Sec. 199A deduction.

A “high-income” taxpayer includes single taxpayers making more than $157,500 and married taxpayers filing joint returns making more than $315,000.

These extra requirements get complicated quickly, but basically the Sec. 199A deduction can’t be more than either 50% of W-2 wages or 25% of W-2 wages plus 2.5 percent times depreciable property.

https://evergreensmallbusiness.com/pass-thru-income-deduction-dozen-things-every-business-owner-must...