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


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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.

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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

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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.

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#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 Richard at Richard@USTaxAid.com or Thomas at Thomas@USTaxAid.com for more information.

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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