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Old 02-24-2017, 11:39 AM
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Do I need to pay myself salary if S corp has ordinary business loss but some capital gain?

Hi,

My S corp has a ordinary business loss. I believe I don't need to pay myself salary since there is no business income. However, I realize my S corp has some capital gain, which is only reported in Sch K. In this situation, do I need to pay salary? Thanks!



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Old 02-25-2017, 02:38 AM
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Quote:
Originally Posted by cheezit View Post
Hi,

My S corp has a ordinary business loss. I believe I don't need to pay myself salary since there is no business income. However, I realize my S corp has some capital gain, which is only reported in Sch K. In this situation, do I need to pay salary? Thanks!
I guess it depends but Not necessarilyUNLESS the S corp has a ordinary income reported on 1120S line 5 and the shareholder receives reasonable compensation from the S corp in the form of distribution;some experts say even if you lose money, your S corp needs to pay ?reasonable? compensation.( even thoughI do not agree with this), This scenario is possible because Reasonable Compensation is not tied to Profit or Loss but to Distributions. However, The IRS treats the distributions as taxable wages to the taxpayer and assessed FICA and Medicare taxes. The IRS guidelines for Reasonable Compensation state: The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly. But it does not mention profit or loss at all but instead talks about ?amounts received? by the shareholder. Therefore it does not matter whether or not the company is making or losing money; what matters is whether or not the S Corp owner is taking money (or other items of value) out of the S Corp.
The S corp ordinary loss reduces AAA balance /stockholder basis while the CG increases AAA/shareholder basis.
It is important for you, the shareholder of the S corp to know your basis in the shares of stock that you own as well as loans made to the corp(if there?re).. with deducting S corp losses. Since the S corp has losses, they are allowed as a deduction on the shareholder?s tax returns to the extent the individual has basi, I mean either stock / loan basis. Without basis, those losses are suspended/carried over to offset future income or basis .You, as A shareholder, to claim your S corp loss, must be losing yuour own money. if the money that was lost in the S corp was really borrowed from someone else, like a bank, you won't be able to claim the loss deduction on your 1040.



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