What is the best way to get money out of my S-Corp?

S-Corporations are a very popular form of organization for small businesses because of their ability to avoid the double taxation of regular corporations. Although not for everyone, there are a number of approaches that S-Corp owners can use to reduce the tax bite from their earnings.

• Be sure to charge all legitimate business expenses to the corporation. If you spend cash on company business (or make charges to a personal credit card), be sure to file an expense report (or similar written document) with receipts for reimbursement by the corporation. Personally paid expenses cannot be deducted by the corporation unless they are reimbursed.

• Investigate whether the corporation can provide any fringe benefits to you. Although S-Corps may not pay life insurance or health insurance for 2% or greater owners (or their spouses), owners can participate in a SIMPLE retirement plan.

• Do you individually rent something to the corporation? For example, a number of our clients personally own the buildings that the corporation uses and they charge rent. Although this rent is taxable income to the building owners (and probably also subject to sales tax), it escapes the large expense of payroll taxes. Be sure that rents charged are market-based and can be documented as reasonable in case you are audited.

• If you have lent the company money, you should be paying yourself interest on that loan. Similar to rent, this is income to you, but not subject to payroll taxes. It also helps to establish that the loans actually are loans and can be repaid; and not contributions to capital.

• The IRS wants you to pay yourself a salary if you provide any services to the corporation. You need to document what you do, how many hours you work, and what outside (market) wages are for a similar position. Salary is usually the least desirable approach, since it is subject to the full range of high payroll taxes. When salary payment is required and when it might be deferred or reduced is a complex question and needs to be addressed with your tax advisor.

• Loans to the stockholders are not taxed. The IRS frowns on these and they can be an audit trigger if abused or not treated correctly. If you make loans, be sure that they are properly documented, bear market interest (which you pay), and are repayable in a reasonable period of time. Also, be aware that you are being double-taxed on the interest, since it probably is not deductible for you as paid, but becomes income (taxable to you, the owner) when the corporation receives it.

What is left over after all expenses are the profits of the corporation. In general, these can be distributed to shareholders when earned or later. Tax is based on when the profits are earned (as reflected on the Schedule K-1 all owners receive), not when the money is distributed. Profits must be distributed in exact relation to ownership interests and may not be distributed if not earned. There are many exceptions and special rules that could apply, so obtain qualified assistance before acting.

The popularity of the S-Corporation form of organization is expected to continue to grow as more business owners become aware of its advantages, but be alert to the many traps for the unwary.

Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or rkulzick@kulzick.com. More information is also available on the firm's Web site at http://www.kulzick.com.

This article provides information of a general nature only and should not be acted upon without seeking appropriate professional advice concerning your specific situation.

© Copyright 1999 Raymond S. Kulzick. All rights reserved. 990618.

This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance. Disclaimer.

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Copyright © 1999 Kulzick Associates, PA - Last modified: September 13, 2008