Originally Posted by minim84
I was looking at an Single S Corp books and I notice that no salaries or drawings is being paid to the Owner/President but money is distributed as Loans from the Corp to the Owner/President. Does this make sense in the eyes of IRS?
In my opinion, in general it does not make sense in the eyes of IRS. In some cases, it depends; UNLESS income is generated , you, as a shareholder/EE of the S corp, are not required to pay W2 wages yourself;however, if not then, your S Corporation needs to pay a Reasonable Salary to you, an officer who work for the corp.
because shareholder/EE salary is subject to payroll taxes, but S Corp distributions to shareholders are not. Therefore, to the extent the S Corp pays the owner distributions instead of a salary, the owner can save big on payroll taxes. But
If the IRS determines that an S Corp owner purposely attempted to evade payroll taxes by disguising employee salary as S corp distributions, it can reclassify the distributions as salary and require payment of employment taxes plus penalties of up to 100% of the payroll tax plus negligence penalties. Reasonable compensation depends on, the locality, the industry, and the roles that the officers play in the company. Note;S corp distribution may result in a tax-free reduction of the shareholder?s basis in the corporation?s stock,
;a taxable dividend, or
;gain from the sale of the stock (generally resulting in capital gain).
I mena an s corp d/b is not from shareholder?s loan to the S corp; shareholder giving loan to an S corp receives an interest NOT distribution. I believe that most of the S corps have no dividend UNLESS if it was previously a C corp or it acquired the assets of a C corp. any interest paid by the corp would equal the interest you must report as income on your 1040., the corp is required to pay interest on the loan(s) you make to it. The interest rate charged must be at least as much as the applicable federal rate, which is determined monthly by the IRS and posted on the IRS Web site, depending upon the length of the loan. There is an exception if the loan balance is less than $10k. In that case, no interest is required