The use of S-corporations has been rising in recent years.However, the challenge is to operate them correctly so as to not create a fatal mistake invalidating your S-corp election, or other problems. Here are some areas to be careful
- Make sure you give yourself an adequate salary. Many S-corp owners take only draws thinking that they can escape all Social Security and Medicare taxes. The IRS is very keep to this one.
- Be careful when you pay back your loans to the corporation. If you used those loans as part of your basis to take losses, you may have to recognize income on their repayment.
- In order for an S-corp to have a single class of stock, the economic interests must have the same rights to distributions.
- When an S-corp shareholder leaves, be sure allocate the activity properly and provide all applicable elections.
If you have an S-corporation, consult your tax advisor when making decisions that may affect its status.We can help.