June 30, 2015
S Corp Tax Preparation Chicago Illinois is a substantial portion of the work that we handle at my practice in Chicago. As a small business accounting and taxation specialist, the tax savings that come with an S Status can be remarkable. But there are several mistakes that are common in the preparation of S Corp Tax Returns.
The form can be incredibly complicated and difficult to prepare properly. Improper preparation can lead to audit. So here are the common mistakes, in no particular order…
1 – Reasonable Compensation
There are a lot of options in taking money out of an S-Corp for ownership. Those options are
a – W-2 Salary
b – Reimbursements
c – Loan Repayments
d – Interest
e – Distributions
Each of these have separate and distinct taxation affects. But salary is the only one that is subject to payroll taxes. The point is that if you are profitable, you have to take a salary and pay a reasonable payroll tax. If you take all of your compensation out as Distributions you run the risk of being audited. If examined, the government could say that all of the profits of the company were actually your salary and charge you payroll taxes, penalies, and interest on the entire amount rather than just the declared W-2.
2 – Unreasonable Compensation
If you have an S Corp that shows a profit of $100,000 in a given tax year, it is unreasonable to take a salary of $100 and a distribution of $99,900. The salary upon which you pay social security and medicare taxes must be reasonable given what you do and the local labor market for that activity. If you were sick or hurt and could not work what would it cost to replace yourself? If that number is an $80,000 a year employee, then you should take an $80,000 W-2 and a $20,000 Distribution.
3 – Health Insurance for a greater than 2% owner
Health insurance is not deductible at the S Corp Level for this type of owner. It may be deductible on the owner’s personal income tax return, but not on the 1120S.
4 – Life Insurance for Ownership
Generally, Life Insurance premiums are not deductible anywhere, unless they are part of an Group Medical policy. This insurance only be deductible if it is a term policy with a face value under $50,000. The deduction for this would be taken on Schedule A of the 1040.
5 – Contributions
Charitable contributions are not deductible at the S Corp level. They are passed through on the K-1 to ownership and are deductible on the personal income tax return given the limitations of Schedule A.
S Corp Tax Preparation Chicago Illinois isn’t easy to do properly. It takes several years of practical experience in order to get it right. If you are having difficulties, we would love to help you. I can be contacted at 773-267-7500 or
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June 30, 2015