I receive a K-1 from the family's S corporation.
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Understand the issue and makes sense.
However, based on your facts, you cannot derive any tax benefit by paying some of the expenses of the S corporation. In fact, this could lead to problems if you won the audit lottery and this were audited by an astute agent.
What is happening here is you are paying expenses of the company. The IRS could take the position that you have technically made a capital contribution, technically increased your ownership and as a result your distributions of allocable income / loss are disproportionate. This would lead to a loss of your S corporation status. Not good.
Additionally, if the IRS looked at this they could take the position you have technically made capital contributions, which could lead to other problems. A contribution to a corporation is tax-free if certain requirements are met. One of those is the receipt of property in exchange for the "cash", which would be stock; you have not done this. Additionally, there is the control test which requires the transferor(s) of property to be in control of the corporation “immediately after the exchange.” This control threshold is 80% and you clearly do not meet this test. The deemed contribution of capital could lead to a taxable event.
So after some long discussion of some tax issues that you probably did not want to hear about, there is really nothing you can do to obtain a tax benefit and could even lead to a tax detriment. The loan to the company is really the only option you have and based on your facts, does not sound like it is feasible.
Best of luck keeping this family farm moving forward.
Understand the issue and makes sense.
However, based on your facts, you cannot derive any tax benefit by paying some of the expenses of the S corporation. In fact, this could lead to problems if you won the audit lottery and this were audited by an astute agent.
What is happening here is you are paying expenses of the company. The IRS could take the position that you have technically made a capital contribution, technically increased your ownership and as a result your distributions of allocable income / loss are disproportionate. This would lead to a loss of your S corporation status. Not good.
Additionally, if the IRS looked at this they could take the position you have technically made capital contributions, which could lead to other problems. A contribution to a corporation is tax-free if certain requirements are met. One of those is the receipt of property in exchange for the "cash", which would be stock; you have not done this. Additionally, there is the control test which requires the transferor(s) of property to be in control of the corporation “immediately after the exchange.” This control threshold is 80% and you clearly do not meet this test. The deemed contribution of capital could lead to a taxable event.
So after some long discussion of some tax issues that you probably did not want to hear about, there is really nothing you can do to obtain a tax benefit and could even lead to a tax detriment. The loan to the company is really the only option you have and based on your facts, does not sound like it is feasible.
Best of luck keeping this family farm moving forward.
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