Hello all,
A new client formed a C-corporation in the middle of 2017 (there is only one shareholder). There are no financials --just bank statements. After working through these statements, I found what looks to be $100,000 in income, $30,000 in personal expenses, $60,000 in withdrawals, and about $10,000 in what appear to be actual business expenses. The question is how to approach this situation with regard to the Form 1120 for tax year 2017.
My understanding is that there are two ways for owners of a C-corp to receive funds from the corporation -- wages and dividends. As no payroll was done for this corporation, I welcome any ideas which will result in a client who is both happy AND tax compliant -- does such a thing exist?!
The first option, of course, is to classify at least some of the withdrawals and personal expenses as payroll, in which case they would need to file late payroll documents and deal with the applicable penalties. In this scenario, any insights as to what the client can expect in terms of penalties would be extremely helpful. As the client's spouse provided administrative services to the corporation throughout the year, the corporation would file a (late) Form 1099-MISC for the spouse for tax year 2017.
The second option would be to classify the entire amount of the personal expenses and withdrawals as dividends, which would have the unfortunate result of double taxation.
The third option would be to classify some or all of the personal expenses and amounts distributed as shareholder loans. However, as the client never planned on paying any of these amounts back to the corporation, this treatment doesn't seem to hold water.
I am curious as to which approach (or combination thereof) you would recommend and why. Your help is much appreciated!