Corporation: Taxes paid to IRS by corporation

[Pacun]

I understand that taxes paid to the IRS for form 1120 are not deductible next year and that's one of the reasons the books and the tax accounting botttom line don't match. Can you elaborate on that?

What can the corporation deduct on 1120 for 2011 if:

Corporation (one 100% onwer) is audited for 2009 (expenses for the amount of $50K were not honored) and in 2011 it pays to the IRS:

$15,000 taxes,

$2,000 accuracy penalty

$600 interest.

After the audit was conducted, the corporation incurs the following expenses.

$30 in postage to send payments to the IRS regarding the audit

$20 in cost of money orders to pay IRS.

Based on the information above, let's say that the corporation had 0 retained earnings ALL the time, what amount becomes retained earnings after the audit? (Nothing was transferred to the owner's personal return.)

How about in quickbooks, how do you record those transactions for 2009 after the audit?

[OldJack]

I understand that taxes paid to the IRS for form 1120 are not deductible next year and that's one of the reasons the books and the tax accounting bottom line don't match. Can you elaborate on that?

Federal taxes are recorded on 1120, page 4, Sch-M, regardless if the balance sheet on page 4 is on the cash basis or accrual. State taxes are deducted on page 1.

What can the corporation deduct on 1120 for 2011 if:

Corporation (one 100% owner) is audited for 2009 (expenses for the amount of $50K were not honored) and in 2011 it pays to the IRS:

$15,000 taxes,

$2,000 accuracy penalty

$600 interest.

After the audit was conducted, the corporation incurs the following expenses.

$30 in postage to send payments to the IRS regarding the audit

$20 in cost of money orders to pay IRS.

On the 1120, the Federal taxes and penalty are shown on page 4, other items are deducted normally in accordance with accounting method.

Based on the information above, let's say that the corporation had 0 retained earnings ALL the time, what amount becomes retained earnings after the audit? (Nothing was transferred to the owner's personal return.)

For book purposes all payments are deducted from profit and reduce retained earnings in accordance with accounting method.

How about in quickbooks, how do you record those transactions for 2009 after the audit?

For book purposes all payments are deducted from profit and reduce retained earnings in accordance with accounting method.

[Pacun]

What other information would you need in order to calculate retained earnings after the audit?

[OldJack]

Ending retained earnings would be the retained earnings beginning balance for the year plus all revenue for the current year less all expenses for the current year regardless if the revenue is taxable/non-taxable or the expenses are deductible/non-deductible. Another way of looking at it is retained earnings equals all assets less all liabilities other than retained earnings itself. Also, any dividends paid would reduce retained earnings.

Only an "extraordinary" income or expense related to a prior year would justify restating the prior year beginning balance of retained earnings. Your IRS audit adjustment of a prior year would not be defined as extraordinary and therefore such expense would be counted as a current year non-deductible expense in the year paid.

[Pacun]

This is what happened... The IRS audited 2009 and found a lot of mistakes from previous preparer. The audit was extended to 2010. During the audit, we told them that the owner took out $12,000 as a "loan" from the company and he was going to pay with interest. The IRS said that they were going to transfer that money to the personal return. I suggested to be transferred as dividends and the IRS asked me if there were retained earnings... I said, "no, but after the audit, the company will have enough retained earnings to cover those $12K and the IRS agreed. They transferred 12K as dividends and we are all happy. Maybe I did get a big break from the IRS on this one. Of course client got punished for 2009 but I didn't prepare the return and we didn't have a leg to stand on.

One last question... could you have a different retained earnings for the books and a different one for the IRS? I have noticed that Quickbooks will add to retained earnings (for next year) the amount to which the corporation paid taxes on.

[OldJack]

This is a C-corp and there is no difference between retained earnings for the corporation and for the IRS. Of course you can have a difference between the taxable income for a year and that difference is shown on page 4 Sch-M of the 1120.

Had the C-corp and shareholder properly documented the loan to the shareholder the IRS probably would not have had a case. This is an example of the shareholder thinking they are the same as the corporation, and now the $12,000 has been subjected to possible double tax by way of the corporation tax and the shareholder tax. Also, the dividend paid reduces retained earnings in the year paid and is not an expense... so no tax deduction.

[michaelmars]

This is what happened... The IRS audited 2009 and found a lot of mistakes from previous preparer. The audit was extended to 2010. During the audit, we told them that the owner took out $12,000 as a "loan" from the company and he was going to pay with interest. The IRS said that they were going to transfer that money to the personal return. I suggested to be transferred as dividends and the IRS asked me if there were retained earnings... I said, "no, but after the audit, the company will have enough retained earnings to cover those $12K and the IRS agreed. They transferred 12K as dividends and we are all happy. Maybe I did get a big break from the IRS on this one. Of course client got punished for 2009 but I didn't prepare the return and we didn't have a leg to stand on.

One last question... could you have a different retained earnings for the books and a different one for the IRS? I have noticed that Quickbooks will add to retained earnings (for next year) the amount to which the corporation paid taxes on.

do you know if this was an audit because of the shareholder loan or was it just something they picked up on.

[Pacun]

do you know if this was an audit because of the shareholder loan or was it just something they picked up on.

The audit was for 2009 (in both years, owner's income (payroll) was very low), since they found a lot of mistakes on that return, they audited 2010 and I told them from the beginning about those 12K "loan" that the owner took out. His salary was low that the 12K dividend... (you know what I mean). My return looked good and that was welcomed by the auditor because I told him from the beginning that the taxpayer was disorganized but I was putting everything in order.

[OldJack]

>>I told him from the beginning<<

A taxpayer representative should normally only respond to questions from the IRS and not disclose anything otherwise.

[Pacun]

>>I told him from the beginning<<

A taxpayer representative should normally only respond to questions from the IRS and not disclose anything otherwise.

Let me rephrase my sentence just in case you are thinking that I told the auditor at the very beginning.... I told the auditor at the beginning of the 2010 audit and when the auditor said that he was going to use "industry standards" to come up with a salary for the owner.

[OldJack]

This is a C-corp and the rules do not require an officer to take a salary UNLESS there is the issue concerning moneys taken out that are not dividends. That would be in this case since there was no proper documentation of a loan. I didn't intend to criticize, only point out standard practice (to readers) working with an IRS auditor.