topic Reasonable Compensation for C corp officer. in Business & farm

Reasonable Compensation for C corp officer.

DeathandTax — Thu, 06 Jun 2019 13:27:52 GMT

Incorporated this year as a C-corp. The company have a net lost during the first year of operation.

The company did not paid any salary to the two officers and during the tax year Officer 1 received interest (110% AFR rate- around 1.5%) for loan that was put up to buy properties, while officer 2 received rent of 4k for using his home for office.

It is fine to not pay any salary? Turbo tax has shown a audit alert.

Edit: For clarification.

"first year startup in rental" #1: In my opinion, every...

TaxGuyBill — Thu, 06 Jun 2019 13:27:54 GMT

"first year startup in rental"

#1: In my opinion, every new corporation needs to start out with a tax professional.

#2: Is this Real Estate rental? I hope not. The number rule is to NEVER put Real Estate into a C-corporation.

Just an FYI:This is not the first year of real estate ren...

DeathandTax — Thu, 06 Jun 2019 13:27:55 GMT

Just an FYI:This is not the first year of real estate rental, but it just the first year incorporated as a C corp (been running a separated rental business other then this).
As for #2: A C-corp can be in some case benefit a shareholder more then a S-corp, especially when some shareholders are in higher tax brackets or the company would like to retain its earnings for investment, and also, sometimes it was not feasible to file for S corp. So please don't say never put Real Estate in a C-crop, and please focus on the question.
Thanks.

I'm sorry to have deviated from your question, but I want...

TaxGuyBill — Thu, 06 Jun 2019 13:28:02 GMT

I'm sorry to have deviated from your question, but I wanted to give you some friendly advice for your situation. I stand by both points, and I REALLY think it would be in your best interest to go to a tax professional.

I should clarify that the 'rule of thumb' is to not put Real Estate into ANY corporation (partnerships are commonly used instead). However, in my opinion, a C-corporation is much worse. Yes, in some cases a Business is better off with a C-corporation than a S-corporation, but holding Real Estate (property that appreciates) is a entirely different situation.

Again, I am sorry to have deviated from your question, so I hope you don't take any offense at my recommendations.

Yes ... when you go to sell off rentals in a C-corp the g...

Critter — Thu, 06 Jun 2019 13:28:03 GMT

Yes ... when you go to sell off rentals in a C-corp the gains are taxed at the corporate level & again on the personal return via dividends. If you use an S-corp or Partnership the cap gains are passed thru & retain the more favorable cap gain rate tax treatment ... this is why RE is not normally housed in a C-corp which is why Bill is not in favor of it.

@TaxGuyBill I understand that you are trying to offer goo...

DeathandTax — Thu, 06 Jun 2019 13:28:05 GMT

@TaxGuyBill I understand that you are trying to offer good advice, which i agree that they are right for most of the time.  As a long term landlord, i very much know the taxes need for property on sale.  However, despite  the tax consequence of putting real estate in a c-crop, but there is sometimes lack of better alternative, in most of the time compared to to wholly owned LLC or partnership can reduce tax bill on sale (as liquidation of real estate have preferential treatment in partnerships).
However, a c-crop is not without its tax benefits, such as the preferred tax rate of (15+15) for the first 50k income, and accumulation of income which delays the payment of dividend taxes.  Lastly, in order to raise capital in equality (sale of stock), to protect the investors (corporate veil) and while maintain majority control in voting rights but not in equality (different share classes), this is not something that that any other legal entity can offer, other then the C-corp.

@Critter#2 Yes, i know about that but due to capital needs, a corp what was needed.  Also, depending where the cash is needed, there are ways to get avoid capital gains, such as 1031 exchange, or simply cash out by the sale of corporate stock.  What C-corp truly losses is the partnership tax benefits, such as converting a rental to a primary home, but no way that the other shareholders would allow that to happen anyway.

Sorry ... folks who usually post here are not as knowledg...

Critter — Thu, 06 Jun 2019 13:28:07 GMT

Sorry ... folks who usually post here are not as knowledgeable as you are so we tend to answer on a third grade level and not college. The moment you said "first year" we thought you to be a novice who really needed to talk to a local professional on the positives & negatives of the C-corp election.

Thanks! I understand it is hard to cater to everyone need...

DeathandTax — Thu, 06 Jun 2019 13:28:07 GMT

Thanks! I understand it is hard to cater to everyone needs, as what might be good advice to one could potentially hurt someone very bad, especially in the matter of taxes.

https://www.accountingweb.com/tax/business-tax/key-factor...

SweetieJean — Thu, 06 Jun 2019 13:28:08 GMT

https://www.accountingweb.com/tax/business-tax/key-factors-in-determining-reasonable-compensation-fo...

https://www.journalofaccountancy.com/issues/2013/sep/20137412.html

So it is safe to ignore that audit alert?

DeathandTax — Thu, 06 Jun 2019 13:28:10 GMT

So it is safe to ignore that audit alert?

On a C-corp the under payment of officers (or no payment)...

Critter — Thu, 06 Jun 2019 13:28:11 GMT

On a C-corp the under payment of officers (or no payment) is not a problem since this means you are overpaying your taxes which the IRS likes. In your situation you have a loss you will retain on the books so ignore the alert.

Thanks!

DeathandTax — Thu, 06 Jun 2019 13:28:13 GMT

Thanks!