I have a new client who’s also a long-term reader that recently brought their business to us. We looked at the 2024 returns and found some red flags.
The client has multiple LLC’s; one for each of their locations in the city and one for a manufacturing facility. The largest of the locations has an S Corp Election, while the others are Single Member LLC’s treated as Schedule C Sole Proprietorships.
The larger S Corp pays most of the bills for the smaller locations. Once the allocation was done moving those expenses to the other LLC’s, the S Corp showed a loss. There were two problems on this return.
1 – The Owner had taken a salary out of this S Corp. Owners of unprofitable S Corps aren’t required to take a salary. This had cost the Owner $11,400 in payroll taxes that were an unnecessary expense.
2 – The tax return also showed a $149K S Corp Distribution. You can’t take a distribution out a company that has a loss and a negative Retained Earnings. This is the sort of thing that the IRS Computers can check that can easily lead to an audit. In extreme situations, this could be also considered Tax Evasion.
Two of the smaller LLC’s were profitable to the tune of about $78K. Since they were both treated as Schedule C Income, this cost the owner another $11K in payroll taxes.
If an S Election had been completed on these, a significant portion of those payroll taxes could be eliminated. Another problem on these entities was the allocation.
As stated before, the larger location is paying many of the bills for the smaller ones. When we looked at the tax returns, one of the locations doing a little under $500K had an “Administration Fee” of $149K.
When asked, the owner had no idea what it was. We can only assume that it was the allocation of expenses from the larger location. This situation can become a problem.
The IRS frowns on this sort of accounting because if the smaller location was audited, there wouldn’t be any substantiation in that location’s name for those expenses.
Let me leave you with this…
When I initially sat down with this client, all sorts of bells and whistles started going off.
First, they had a part-time bookkeeper, trying to keep the books straight.
The problem is that while their bookkeeper had an MBA they don’t know tax law and they have no idea what’s deductible. They certainly don’t know how to keep auditable books and records. This leads to positions in the bookkeeping that are problematic.
Positions like there are four entities with four separate Employer Identification Numbers, but there aren’t four separate Balance Sheets. Yep. That’s right. All four of the companies were being kept in the same General Ledger with only one Balance Sheet.
Second, they had a CPA that simply took the work from the bookkeeper and slapped it on a tax return that lacked strategy and due diligence. This is how the client potentially ended up paying all of those extra taxes.
The combination of the bookkeeper and un-strategic CPA also explains the Distribution which could easily lead to an audit or possibly worse. Let’s all thank God that the returns were only prepared and not filed.
My new client signed an agreement for us to go through 2024 to straighten out the returns. Moving into 2025 we’ll complete their monthly bookkeeping and have already discovered even more tax savings that are possible.
If you have these sorts of problems, we’d love to talk to you.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
SIncerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
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