1120S Compnesation of Shareholder/Officer

[Small Bsiness Solution Cen]

I took on a new client that has two small businesses. I am fighting with them over their failure to do withholding or make quarterly payments. If I list their income form the business as compensation for shareholder/Officer can I issue a 10-99-MISC at the end of the year or will it carry over onto the K-1?

[grandmabee]

Compensation is W-2 wages.  If they didn't pay wages last year, take it to distr.  if they are over their basis then tax it.  For 2020 set up on Payroll.

You can't redo what didn't happen.

[michaelmars]

if you show it as 1099 then you wipe out the profit.  net result to irs is the same except for unemployment insurance.  First year or 2 until you establish its a viable business I would have no problem doing this.

[DANRVAN]

Case law has been firm in recharacterizing distributions as wages, following rev rul 74-44.

 

On 3/14/2020 at 12:46 PM, Small Bsiness Solution Cen said:

I took on a new client that has two small businesses. I am fighting with them over their 

I would ask why this client came to you.  Is he shopping for a preparer that will do it his way?

 

On 3/14/2020 at 12:46 PM, Small Bsiness Solution Cen said:

can I issue a 10-99-MISC at the end of the year or will it carry over onto the K-1?

 

In the case of Grey,  independent contract services paid to the the sole shareholder of S-corp CPA firm were recharacterized as wages subject to payroll taxes.

My question is this, can you sign a return and call it accurate knowing that a payment that should be classified as a reasonable salary has been declared a distribution or contract services?

[BulldogTom]

8 hours ago, DANRVAN said:

My question is this, can you sign a return and call it accurate knowing that a payment that should be classified as a reasonable salary has been declared a distribution or contract services?

This is always the problem.   What to do when the accounting has been done wrong.

Edsel got scolded earlier this month by me for suggesting to change the accounting to benefit his client to get a tax credit.   (BTW - I am sorry I came off so hard on Edsel, I still feel the same way, but I should not have said it).

If we are not paid to do the bookkeeping, we should not be doing their bookkeeping.   We advise on the tax laws, we prepare the forms based on the presentation of the books.   The client is responsible for the information they give us.   

But the rub is we need to make "reasonable inquiries".  And what if you find something wrong?   How to handle it?  This is where the IRS tries to drag us in to audit work.

This is the dilemma of the tax preparer since the beginning of the code.

Tom
Modesto, CA

[Lion EA]

Exactly. In our role as tax preparers (they already have bookkeepers) our job is to accurately report what happened last year. When we do our DD, we might find out that something that already happened was wrong. Case by case. I always explain to them what was wrong and how to do it correctly this year. But, depending on their reactions, what the issue was, and probably how I'm feeling that day, I might see an alternative reporting or hand the person their papers back or check in with them in a couple months to see how their mid-year books look or send them a firing letter when I have time.

[DANRVAN]

3 hours ago, BulldogTom said:

we are not paid to do the bookkeeping, we should not be doing their bookkeeping.

Tom I believe it goes beyond that.  We have a responsibility to prepare a complete and accurate tax return.

If a client posted a $40,000 piece of equipment as supplies would you report it as such?  Or a $5,000 family vacation as business travel?

Rev rul 74-44 and case law clearly indicate we must consider whether a reasonable salary has been recognized; regardless of how the client / bookkeeper has posted it.

 

[BulldogTom]

37 minutes ago, DANRVAN said:

If a client posted a $40,000 piece of equipment as supplies would you report it as such?  Or a $5,000 family vacation as business travel?

Those are the easy ones.   The transaction happened and was just mis-coded.   Or the transaction is not deductible by the company.   

But to go back in time and recreate what should have happened is a little different.   The S shareholder knows or should know that they need to take a reasonable compensation.   If they choose to ignore the law, it is not for us to force them to do so.  

It is no different than worker classification.   If the company brings me their 1099's showing 10 workers as independent contractors, should I make them go back and do payroll for it if I think they are employees?   If the company presents the documents, says they made their determination, what are we to do?   IRS would love for us to do just that, but we are hired to do the work for the client, not the IRS.   It seems to me that the IRS wants us to do their job as well.

These are the sticky ones.   We see these things and we advise our clients on the law, but ultimately, they sign the return attesting to the accuracy of the positions taken on the return.

I am not arguing with you Dan, I really see your point, but we are put in these moral dilemma's every day.

Tom
Modesto, CA 

 

[DANRVAN]

20 minutes ago, BulldogTom said:

Those are the easy ones.   The transaction happened and was just mis-coded.   Or the transaction is not deductible by the company.

They are not really that different.  The client posted it one way and we know it should be some thing different in accordance to tax law.

35 minutes ago, BulldogTom said:

If they choose to ignore the law, it is not for us to force them to do so.

And if they chose to call it a distribution instead of a wage per rev rul 74-44 and case law, I will not sign it and perpetuate their choice for noncompliance.

[DANRVAN]

41 minutes ago, BulldogTom said:

It is no different than worker classification.  

That is a whole different situation based on facts and circumstances.