Dear Tax Guru,

Please Help... I need answers...What if our LCC earned a profit while we were on unemployment?

In Dec. 2008 my husband and I had to close our business after twelve years(a C-corp) and claim bankruptcy on it. We were the only 2 employees and we paid ourselves though payroll (W-2). We were able to claim unemployment insurance, and are still receiving it due to all the extensions. Before we filed for unemployment (or even knew we could) we formed a new LLC (elected to be taxed as corporation) to try and support our family. Well much to our surprise, we got a lot of business. My problem is that now, for 2009 we are showing a profit of $53,000.00. It is all sitting there in our company checking account. We have not paid ourselves anything from the company and have continued to draw unemployment. I know this sounds very bad but after everything that we had been through (losing our company of twelve years, losing our home, our good credit, etc…) we didn’t want to give up the “security” of the unemployment checks until we knew we could support ourselves through the new company because once you tell them you’ve got a new job it’s over, even if you lose that job a week later.

Now we need some of that money...What can I do?
If we pay ourselves now will that be unemployment fraud? What will happen when I file the Corp tax return for 2009 showing a profit? Can we reimburse ourselves for mileage, meals, office expenses, rent? And if we do reimburse ourselves but don’t pay ourselves any actual wages won’t that raise a red flag with the IRS. How can you have work related expenses if you weren’t supposed to be working? Can we get the money out though a distribution?

Please help I’m very scared that I may have done something illegal. I just had no idea that our LLC would earn that much money.