Tax issues regarding S corporation salary, bankruptcy, being a material participant makes a major difference, Cost Segregation Study developments
Jeffrey Brooks, CPA for JBrooks Wealth Advisors, PC
602-292-2009 jbrookscpa@cox.net
Unreasonable Compensation for S corporation shareholder.
. Eight Circuit Upholds District Court Holding That CPA-“S” Corporation Shareholder Took Unreasonably Low Salary (W-2) Relative To Distributions – David E. Watson, P.C. Case – The courts have routinely upheld IRS’s authority to reclassify distributions as additional payroll where an inadequate wage has been paid to an “S” corporation shareholder-employee. The CPA firm only paid the shareholder-employee a wage of $24,000 in the two tax years under IRS audit while the shareholder received six figures of distributions in each of the two years (about $175,000-$200,000 of distributions per annum.
NOTE: I truly believe that Congress will deal with this FICA-SECA issue in the next two years by modifying (through legislation) Rev. Rul. 59-221, which currently indicates that “S” Corporation Schedule K-1 income is not subject to SECA (self-employment tax).
Bankruptcy cancellation of debt-avoid taxable income
2. The Taxpayer (eg: Individual) Is The Owner (And Not The Disregarded Entity) For Purposes Of The COD (Cancellation Of Debt) Exclusions Under IRC 108 (See Prop. Reg. 1.108-9) – This proposed regulation is important for understanding single-member LLCs (SMLLCs) and bankruptcy petitions/the bankruptcy COD exclusion. Where an individual wants to claim the IRC 108 bankruptcy COD income exclusion, both the SMLLC and the individual will have to file bankruptcy petitions.
3Court disallows loss utilization from ranch activities because he failed to prove material participation (could not substantiate hours necessary for material participation). Most of the time that was was spent by the taxpayer at the ranch was in the role of investor which does not count towards the material participation tests.
4. Peco Foods Tax Court Case – T.C. Memo 2012-18 – Large poultry company could not use a cast segregation study and an IRS Form 3115 to effectuate a change in depreciation lives originally stated on an IRS Form 8594. When a client does an asset acquisition, IRC 1060 applies and the asset allocation agreed upon by the parties (as reflected in Form 8594) is binding and must be consistently followed by both the seller and the buyer.
