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Do you have an S-Corporation? Are you on salary or are you just taking distributions? Did you know that S-Corporation shareholders are on the list of priorities for the Internal Revenue Service (IRS)?
Why would S-Corporation shareholders be on the IRS radar? The IRS is finding that many S-Corporation shareholders who are active in the business are not taking a salary. Instead, many of these shareholders are just taking distributions. Why would a shareholder take only distributions? Perhaps they were told that by taking only distributions they will save on taxes. This sadly misguided and misleading advice. I will discuss in another blog why the tax saving advice in this case is bad advice. The IRS requires that "distributions and other payments by an S-Corporation to a corporate office must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation." -- From the Instructions for the 1120S.
For now think about this: Do you provide substantial services to the business? What would it cost to replace you? These are good starting points for determining what your reasonable compensation should be.
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