S Corp with 1099MISC Income

A one s/h S Corp (never a C Corp) collects Gas Royalties as it's only source of income (receives an annual 1099Misc) and simply banks the funds each year, no other activity at all. At some point there will be a "distribution" from the S. My question goes to the S not having payroll, concerning! as the "routine" at least "seems to be" designed to avoid se tax. Can the s/h simply distribute the funds to himself without issue? ty

no other activity at all

Who pays tax prep, annual report fees? Severance taxes, depletion deductions?
Sounds like another misguided S-corp election, creating more problems than it's worth.
What kind of $$ are we talking about....how visible is the reasonable compensation issue?

We're advised it's $6k-$8k per year over "many" years..... guessing 12-14 yrs so far. S/h pays the bills from the S.

Way under the radar.

Except, when the distribution finally occurs, at some point in the future it'll be in excess of $100k...

Is the distribution previously taxed and reported income? No worries. It sounds like the client has been saving the royalty income in the S-corp and as long as it doesn't exceed the stock basis, it isn't taxable as it has previously been taxed when earned.

He's concerned about pulling the distribution with no salary, even tho' it's investment income.

He's concerned about pulling the distribution with no salary, even tho' it's investment income.

Should he be?

That's what I've been wondering. Let's say you had, for odd reasons, investments in an S. So only interest, divs, cap gains over the years. Now you distribute....no work has been performed, so salary required....but are you asking for trouble with 100k distribution and no wages. Technically, it's not line 1 on K-1 profit, is it? Page 1 of the 1120S is blank. I don't see a problem.

+1 Line 16D, not income.

so salary required.

You mean no salary required.

If you all please (and I understand your great points of view) and I have this issue with commercial property landlords, too and now royalties, those who file as an S, collect rent, 199A, I've posted about this previously:

"S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."
Under section 7436 of the Internal Revenue Code, the IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes."

Is there an "exemption" depending on the activity, maybe I'm missing it....

How much activity are we talking about here?
Reasonable compensation can't be much, if you're really concerned about it.

My only other comment is that there isn't any SE tax avoidance here on the underlying activity.

probably not much...

...."for services..."....it's in there a couple times. What sort of services has the s/h provided? Tucked the investment papers into a file and banked the check? (Probably direct deposit anyway!) So...no services provided. Or at most, investor services, not employment.

I understand your point JR1 and I agree with all the input, otoh.....
Description does not read: "investor services" are exempt. There's also arranging for tax prep, banking, filing annual report with the state, corresponding with the investment company, routine filing, research on the investment perhaps looking at different investments, attending the annual meeting. Maintaining the corporate book.
Now, I'm not planning to suggest payroll, but the instructions call for payroll...... and there's no resolution to this, I realize.