If you haven’t yet filed your S Corporation return, or even if you have and you’re thinking ahead, then you don’t want to miss today’s blog.
The way you file your return can determine whether you get an audit or not.
Here are three mistakes that can land you in hot water with the IRS.
Mistake #1: Not reporting/paying officer salary.
This is at the top of the IRS hit list – S Corporations that have income but don’t report salaries paid to the owners.
The solution is simple – pay a salary. And if you pay the salary, make sure it’s reported on the separate line item for officer salaries, not just lumped in with all the rest of the salary on the regular salary line. (If you don’t know what I’m talking about, that’s fine – just make sure your CPA does!)
The IRS will be targeting this one issue even more closely in the future simply because salaries you take from your company are subject to Social Security and Medicare tax, while distributions are not. They want the extra payroll taxes and you probably are less inclined to pay them. So, they’re watching to make sure you pay at least some of your fair share.
Mistake #2: Making needless changes to how you report.
This is one that just caught a new client of mine. A few years ago, he changed accounting firms and the then new firm changed how he reported expenses on his return. They moved all of the cost of good items to miscellaneous expenses.
Now never mind if the cost of goods should have been reported the way they were before or not, the issue was that the IRS saw a major change in the return.
And that was the reason they got audited, according to the IRS auditor.
When you become a client of my company, US TaxAid Services, we will change your tax return so you pay less tax. But we won’t make needless changes that raise an audit red flag. Instead we thoughtfully consider the consequences and weigh the pros and cons of each change. We very well might avoid a change that would save you a few hundred dollars but could be a huge red flag.
Talk any changes over with your CPA first.
Mistake #3: Failure to calculate basis.
This one is a little harder to explain in just a few paragraphs. Basically, if you have a flow through entity like an S Corp or a partnership and you have a loss, you must first have basis before you can take the loss against your other income.
No basis = no loss, even if you company lost money.
This is true for all types of flow through entities, but it’s a special issue for S Corporations because it is harder for an S Corp shareholder to get basis.
For example, let’s say you need to put money into the S Corporation to cover some shortfalls. If your company borrows money and you co-sign, this does not count as basis. But if you borrow the money personally and then personally loan the money to your company, it does count as basis.
And remember, you need basis to take the loss. The IRS will be checking to make sure you have a basis worksheet backing up any losses you take. Check with your CPA to make sure yours is up to date.
This is just one of the dozens of S Corporation tricks we talk about in The Tax Return Preparation Survival Kit. Remember the special price of just $99 expires this week.