I filing a 2017 1120-S tax return for a trucking company. They are a majority owner in an S-Corp. I am going back and amending their books so they receive a W-2 and pay payroll taxes. They have a lot of expenses they did not run through the company. Is it too late to include these in their books? ====>>Why not?? As you know, each shareholder/employee reports the S corps income and expenses based on his or her percentage of ownership on individual returns via form Sch K-1 of 1120S determining which expenses are used as deductions passed onto an individual and which are used to calculate the S-Corporation's net income. S-Corp subtracts ordinary business expenses such as rent, taxes, depreciation, advertising, interest and employee benefits provided by the business.
They thought they could use a 1099-misc and add them on a Schedule C. Since they need to take a salary and cannot do that their AMT tax bill is huge. Any suggestions?====>>no.
One of the biggest IRS rules for S Corps is that the greater than 2% shareholders MUST TAKE reasonable compensation from the S Corp as a W-2 employee; there are significant FICA/Medicare tax savings if a business files as an S Corp instead of a llp or sole proprietor, so the IRS wants to make sure they are getting their fair share of employment taxes. Unfortunately, the tax code does not give a definition of reasonable compensation, so tax pro, cpa, irsea, work with clients individually to determine their annual salary from the S Corp, so,it?s important to remember. that the greater than 2% shareholders receive W-2 compensation, NOT a 1099-MISC from their S Corp..
Could they pay themselves via a W-2 and also receive income as a Sole Proprietor? Then they could add these expenses on a Schedule C and not a 2106.====>>No. as mentioned above. Tax rule states that an officer/shareholder of a corp is considered an W2 employee ?subject to payroll taxes on remuneration paid to services performed.? Also, the Tax Court Case states that a salary cannot be in the form of shareholder distributions or 1099-MISC payments.