Wondering if I can pass along all S-Corp receipts to my C-Corp, given the following:
-I own 100% of S-Corp
-S-Corp provides consulting services to one client
-S-Corp has five independent contractors that it will issue 1099's to
-I also work for the S-Corp that serves the one client
-Can I pay the independent contractors then pay my C-Corp the remainder of the income without taking a salary from the S-Corp? Then take a C-Corp salary?
Not trying to avoid SE tax or anything, just getting all the $ over to the C-Corp.
Does the C-Corp do any other business ? Does the C-Corp bill the S-Corp for your services ?
Doing what you propose could get the S-Corp audited for failure to pay the owner a salary.
What do you think you'll achieve?
assume S-corp left with $50,000 before salary and a reasonable salary is $20,000 for purposes of this example (i'm not saying a 40% of profit is reasonable - under certain circumstances the IRS could easily say it's too low)
on your 1040 you would report a $20,000 salary and a $28,500 S-Corp profit (the S-corp would pay about $1,500 in payroll taxes) . S-corp profits are not subject to self-employment tax. $48,500 in taxable income
and you and the corp have paid $3,000 in payroll taxes (remember $1,500 comes out of your salary as your share of fica and medicare taxes
now instead you pass the $50,000 to the C-Corp (without a business purpose the IRS could easily nail you for penalties and interest by disallowing the S-Corp payment and failure to take a salary and failure to pay payroll taxes) If you tax a $20,000 salary and leave the $28,500 (the C-corp would pay about $1,500 in payroll taxes) the C-corp will have to pay income taxes on this and if you tale the money out it is a dividend which is taxed again So say you zero out the C-Corp income by taking a $46,500 salary. (the other $3,500 is its share of payroll taxes)
now you only have $46,500 in taxable income but you and the corp have paid $7,000 in payroll taxes.
so $2,000 less in taxable income by paying $4,000 more in payroll taxes
Slightly more $ than that, but the plan will be to keep the leftover $ in retained earnings and lend to other ventures, including personal real estate investments.
Make sense? I basically want to know understand what the issue would be with passing almost all of the income from the S to the C.
I basically want to know understand what the issue would be with passing almost all of the income from the S to the C.
I believe @Anonymous explained this and @Critter alluded to it, but you cannot simply pass income received by your S corporation to your C corporation without tax consequences; the net profit from your S corporation will be reported as income to you on the K-1 generated when the 1120-S is prepared.
Subsequently, you can pass those (after-tax) funds from your S corporation to your C corporation but you really cannot do that without the tax consequences of the income being earned (received) by the S corporation.
Thanks for the quick response! Apologies if I wasn't clear here - the S-Corp will take in all of the receipts then pay the C-Corp 90% or so of the receipts. Can take a salary from each corporation - just prefer to get the majority of the after-salary profit to the C-Corp to pay the 21% rate then not issue a dividend, instead using the retained earnings to loan to other business ventures (myself and others).
I, for one, am still not certain whether or not I have a firm grasp on your thought process in this regard.
However, if you are planning to pass along to the C corporation 90% of the S corporation's receipts, you can certainly do that, but those S corporation receipts will factor into the S corporation's net profit and appear on the K-1 you receive from the S corporation.
Hard to articulate, I suppose!
1) S-Corp takes in $500K
2) S-Corp pays independent contractors $100K
3) S-Corp has $400K in profit prior to paying C
4) S-Corp pays $350K to C-Corp
5) C-Corp reports $350K in receipts, pays owner $100K salary, is taxed at 21% on remaining $250K
6) S-Corp K-1 shows $50K on the K-1 as net profits
Is that better? My main concern is that the S-Corp is the primary operations with the lone outside contract, so don't want the C-Corp arm to get blown up as it doesn't have a contract with any outside party, just the related S-Corp.
6) S-Corp K-1 shows $50K on the K-1 as net profits
Nope, and that was the primary point of my previous post. Your S corporation cannot just pass the income it receives to the C corporation prior to that income factoring into the S corporation's return and the K-1.
Thus, it is the S corporation that will have to show all of the profit generated from the income it receives prior to passing it along to the C corporation. Any other outcome does not comport with federal income tax law and regulations and is further exacerbated if the S corporation receives a tax reporting statement (unlikely since it is a corporation, but it is possible).
If I was an IRS auditor there are 2 issues I could have a field day with this situation ... First is that you are not being paid a fair salary at the S-corp level as required and the fact that you are trying to fund the C-Corp with untaxed S-Corp funds.... I highly recommend you sit down with a local tax attorney to get educated on what is allowed and how to structure this venture.
Hold on there partner - I think you may be missing the fact that the S-Corp is paying the C-Corp for services. I can, and will take a small salary from the S-Corp and take the majority of salary from the C-Corp.
just because you passed all the income to the C-Corp doesn't mean you can avoid an S-Corp salary. the tax laws require reasonable salary for services performed. the law does not state that if you do not have a profit, you can ignore taking a salary. further, if the C-corp lends money to ventures, then the laws would require it to charge interest on the loans (passive income). A C-Corp with enough passive income would be a Personal Holding Company and that has other tax consequences.
further with real estate investments involved, I can not give you any assurance that they could deduct that interest.
there apparently is no economic basis to do what you suggest. without an economic basis, if the IRS catches it, it will almost certainly disallow, based on current tax law including numerous court cases, the deduction on the S-Corp then impute a salary to you. you would be subject to substantial penalties, taxes and interest. Without an economic basis, on the C-Corp side the IRS could disallow the salary deduction and treat it as a dividend. More taxes penalties and interest.
it may also surprise you to learn that while the IRS could deny the C-Corp the salary deduction, it still would remain salary on your 1040 and to that the imputed S-Corp salary. and you could actually end up with more in taxable income that you really made.
further, at a minimum the IRS could open 2 of the most recent prior years and do the same.
if the IRS deems what you have done arises to the level of tax evasion even more years could be opened.
you would accomplish almost the same thing without tax risk by taking a salary from the S-corp, paying personal income taxes on the remaining profit and salary, and distributing tax free those profits to invest or use however you like.
Hackitoff - thanks for the response!
I don't think the PHC would ever be an issue because interest income from loans would never come close to the C-Corp income from providing services to the S-Corp.
Also, as mentioned previously, I do plan on taking a salary from both entities.
I just am uncertain of any issues that arise when S-Corp gets 1099 income from one client, then pays C-Corp to provide the majority of the services (and therefore receives about 90% of S-Corp receipts/income/whatever).
And yes, I am aware that this structure is not optimal but it is what I have been dealt.
Your story keeps morphing as this thread continues ... PLEASE spend a few dollars to consult with a local tax attorney so you are sure you are on the right side of the law with what you are proposing since many of us on the forum think you are playing a bit fast and loose. This public forum is not really the place you want to rely on for accurate tax information in your situation.