Following is an excerpt from the approval letters the IRS sends to taxpayers that apply for Federal Identification Numbers. These are issues that we feel IRS will be targeting during its audits of S Corporations. We will be sure to contact you if any of these items pertain to you in order to correct these issues and keep you and your Company in compliance. If you have any questions, please feel free to contact us at 706-692-6536.
“The Internal Revenue Service has identified several mistakes commonly made by S corporations and their shareholders.
- Losses in Excess of Basis – Pursuant to Internal Revenue Code (IRC) section 1366, a shareholder in an S corporation may not deduct S corporation losses in excess of their basis in stock and/or debt. Each shareholder’s stock basis and debt (loans from shareholders) basis should be computed annually.
- Taxable Distributions – Pursuant to IRC section 1368, distribution to shareholders in excess of stock basis are generally taxable.
- Gain on Repayment of Loans from Shareholders – where the shareholder previously used debt basis to absorb S corporation losses, subsequent repayments on the loans are generally taxable.
- Compensation to Shareholder – If the shareholders performing services for the S corporation, be careful not to improperly classify the compensation as payments other than salary (examples; excessive rent, or distributions) in order to avoid employment taxes.
- Fringe Benefits – Certain fringe benefits paid on behalf of a shareholder who owns more than 2% of the stock (or shareholder’s family) are taxable. Examples include certain accident, health, and life insurance premiums, meals and lodging, and certain cafeteria plan benefits.
- Accrual of Expenses Due to Shareholders – Pursuant to IRC section 267, an accrual basis corporation may not accrue and deduct expenses (such as rent) due to a cash basis shareholder until the amount is includible in the income of the shareholder (when paid).”