S-Corp Distribution

Former preparer died and I now have the return. It is a construction firm. Less than 100k gross. The income and expenses were similar in 2017. The single owner did not take a salary. I have all the same categories of deductions for 2018 that she showed for 2017. However, she listed 35,000 and called it a distribution. What would this be for? This is how she got him to a loss. Am I missing something? Also, she put all the construction supplies in cost of goods sold. I listed them with expenses and called it supplies rather than in COG. Not sure which is correct.

She may not have understood S corps well. Either it's a distribution, and not an expense...or it's an expense that would go onto the Sch. C with some SE attached in lieu of a salary.

I'd likely use a COGS for a contractor, but it doesn't matter.

Thanks, JR1......you have helped me out many times. How do I get the profit to flow to sch C? The K-1 line 1 is going on as ordinary income to Sch E with no SE. I understand that he needs to pays this. But, how do I handle this on the software or do I do something on the K-1 in the 1120-S return? Do I tax the entire net profit. (26k)

You'd show a deduction for Officer Salaries is what I usually do. That drops your line1 K-1....then you need to enter a Sch. C in the 1040 for that amount.

I've had a similar issue in the past, Bell. As JR says, you can put the "Distribution" on a separate Sched C and take care of the employment taxes. It doesn't automatically flow through though and a 1099 should be issued. I would set it up separately taking the information from a 1099. I would call the "Distribution" on the S Corp something else, like Director's Fee, Consulting, or something similar. Then you tell the client they need to be on payroll and make that change for the current year. If there is still a profit in the S Corp, that would be handled in the normal way and be taxed.

I've also had to fire a client because he wouldn't listen and just kept taking money out every year, in his case it was a huge problem because there were two shareholders that were 50/50 with one of them more of a silent participant and getting zero out of the business each year. He told me his Georgia or Florida or Texas (I don't remember which) didn't do things that way.

How do I get the profit to flow to sch C?

You don't. That's not how S-corps work.

The K-1 line 1 is going on as ordinary income to Sch E with no SE.

The system is treating this properly. What your client hasn't done is pay payroll, which is where his "SE tax" exposure would lie.

For 2019, have him pay himself payroll or see if you can get him out of the S-corp. Most contractors can probably liquidate their S-corp without too much negative tax consequences. Lots of discussions here about S-corp liquidation and what to pay attention to in making that happen.

For $100K in gross, an S-corp is probably not his best entity structure.

I agree with Capt Cook. With that kind of income, payroll is more of a headache than anything else, and it sounds like the client probably doesn't really get how the corp works and just takes money out of it like it is a sole proprietorship. He'd most likely be better off as an SP and making ES payments.

But once you give birth....there you are. No going back.

I find nearly every client is willing to be lead correctly....so lead him to doing things right.

Many thank you's to all of you. How much do you typically put on the Sch C? Would you put the entire net profit? It is 26k right now.

Another issue is his 2017 return. 35,000 deduction titled distribution which created a loss. As a result he is under reported 35k. Not to mention the SE tax on this. The preparer is deceased. I will inform him of the situation and the consequences. What is my obligation beyond informing him and telling him that it should be amended? I don't trust anything that was done on that return and amending will take loads of work. Not sure I would get paid. The 2018 return is going to be a shocker.

Not sure I would get paid. The 2018 return is going to be a shocker.

This is more of a practice management suggestion...

You have no moral obligation to perform work. I think most of us got into this business because we enjoy being helpful. Performing work with that in mind over ensuring I got paid has burned me more than once and, to be candid, will probably burn me again.
Ask for a retainer before you do any work if there is a question. If he's a contractor, he's well acquainted with that practice.

If he chooses not to pay you, you were probably going to work for free anyway. Take the time you were going to spend on all those returns and have a beer, grab a book, take a walk, etc. and you're money/stress ahead.

Bell, with one of myclient's who did this, I think it was the first time I saw it done, it was very late to issue a 1099. I prepared the sched C based on what she had actually taken out. It sounds like for your client, there is an expense item called Distributions and it is about $35,000. Taking that into account, there is still a net profit of about $25,000. I would put the $35,000 onto the Schedule C as income (call it director's fee, or consulting fee, or management fee) and let the $25,000 flow through as it would normally on the K-1 as income. I would also sit this person down and have a heart to heart talk explaining how S-corps work, that he needs to start taking payroll if you are going to continue working with him or suggest that he kill the corp. I think your obligation as defined by Circular 220 is to let the client know that the 2017 return has been prepared in error, your recommendation is that it be ammended and that in doing so there will be a tax liability and you won't know how much until the amendment is prepared. At that point you get his approval to ammend and his agreement to pay you. If he doesn't agree to what you are discussing, then let him know you can't continue to do his work. His problems shouldn't become your problems, and you shouldn't lose sleep worrying about him or whether you will be paid.