S-Corporations: Watch out for those Glacier Crevasses

Have you ever watched a mountain climbing movie or documentary where they have to cross a glacier that is covered with snow.  The climbers move at a snail’s pace checking the ground in front of them for a hidden crevasse.  One bad step and they can drop a hundred feet into a icy grave.  Certainly not the environment for a mild mannered CPA.

Maybe this is too dramatic for operating an S-corporation, but the wrong moves can send you plummeting into tax despair.  Here are a few CPA tips if you are a closely held company:

1. Make a timely and valid election. The IRS has eased up on the deadlines for S-corporation elections, but don’t take them for granted.  Always make your elections timely, and if not, try to fit into one of the exceptions that gives you a grace period.
2. Pay yourself a reasonable salary. As CPA’s we see many owners trying to take a disproportionate amount of draws as opposed to salary.  The IRS doesn’t like this because the owner/officer is skipping out on paying FICA and medicare withholding.  Make sure your salary is reasonble for the service you are providing.
3. Report medical insurance deductions properly. A 2% + owner cannot deduct the medical insurance in its S-corporation.  There is a tricky manuever that you have to add the insurace to your W-2; deduct it as part of your salary; lastly take the insurance as a self-employment health insurance deduction on your personal return.  It usually takes a CPA to discuss this with your payroll service.
4. Don’t Be Second Class. S-corporations cannot have more than one class of stock.  Do not inadvertantly create a second class stock by having different voting rights, or disproportional draws.
5. Watch out for your Tax Basis when Deducting a Loss. Just because you have  a loss does not mean you can take it.  You must have a tax basis to do so.  In other words, you cannot take out more losses than what you have invested plus profits.  The basis calculation should be updated every year.
6. Have your CPA plan your tax strategy each year. We find many new clients whose CPA’s ignore the S-corporation in tax planning.  You must dive into it during the year, not March of the following year.

These might seem tough, but your CPA should automatically monitor the things above.  To not do so could present shocking surprises in April.  Check with your CPA before implementing any of these points.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.