4 Things You Must Avoid If You’re Filing an S Corporation Return | USTaxAid

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4 Things You Must Avoid If You’re Filing an S Corporation Return

Written by Diane Kennedy, CPA on March 30, 2010

The S Corporation is the perfect business structure for most businesses. But that doesn’t mean it’s completely risk free. The GAO reviewed a sample of S Corporation tax returns for two years and discovered that 68% were done wrong. Over half were wrong! And of those wrong returns, over 70% had been prepared by paid preparers.

There were some problems that they discovered, again and again. As a result, they are calling for a crack-down on tax preparers who aren’t CPAs or tax attorneys. In fact, pretty soon the IRS may well be requiring that all tax preparers are licensed.


Here are the big problems that caused the IRS to sit up and take notice:

#1 S Corporation Audit Flag: Failure to Pay/Report Officer Salary

Does your S Corporation have taxable income? If so, you most likely need to take a salary. Otherwise, the IRS is going to be asking why.

Report the salary that is paid to you (as owner) under Office Salary.

#2 S Corporation Audit Flag: Not Reporting Medical Insurance Correctly

The S Corporation rules on medical insurance deduction really don’t make a lot of sense. But, here goes anyway.

If you have medical insurance that is paid by your S Corporation and you are a more than 2% shareholder, the amount of the medical insurance needs to be added to your W-2. You can then take a partial deduction for self-employed medical insurance.

I have no good answer as to why the IRS has us go through this convoluted way to get the deduction – but they do.

Do it wrong, and you’ll lose the deduction.

#3 S Corporation Audit Flag: Crazy Deductions

Well, this is a bit of a lump of some of the bad corporate advice that people are told. The problem is, it’s just plain wrong. You risk audit, penalties and interest. Here are a couple to look out for.

  • Taking the deduction for 100% of your living expenses and claiming it as a business deduction.

WRONG! You can take a home office expense. You can take meals expenses if they are tied to true business purpose. But you can’t be a pig and take it all.

  • Running your real estate through an S Corporation in an attempt to take a real estate loss write-off.

WRONG! An S Corporation can’t change the character of the loss. It’ll still be a real estate passive loss.


#4 S Corporation Audit Flag: Losses With No Basis

This one is a little more complicated. We covered it in detail in our last USTaxAid Coaching Call, Filing Your S Corporation Tax Return.

In a nutshell, you must have (1) equity basis and/or (2) debt basis before you can take a loss. If your S Corporation is selected for audit, you’re going to get asked to provide the permanent file basis worksheet.

I’ve found that this is a BIG problem for many S Corporation owners who have losses. Are you concerned whether you have a problem? Find out for FREE with a tax return review. Please Contact Us.

Still coming this week:

Wednesday: Is Your State About To Put You Out of Business? 3 Things To Fix Now

Thursday: What to Do When the IRS Says They Want to Audit Your Real Estate Losses

Friday: You vs. the IRS: 3 Little Known Secrets To Winning an Audit

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