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S corporation distribution under attack — again
Source:
businessobserverfl.com
- Aug 23, 2017
Sometimes, the IRS is like the little Dutch boy, sticking a finger in the dam to stop the flow of water. When it comes to the taxation of S corporation compensation, the dam has had quite a few leaks over the years, and considerable effort has been applied to keep the dam sound.
The main reason for these leaks, and the constant vigilance, has to do with the difference in taxation of compensation and S corporation distributions — compensation is subject to employment taxes and distributions are not.
Back in the early 1980s, S corporation owner compensation was typically low. The IRS looked at officer compensation in corporations, but that was mostly in C corporations, and the issue was that too much compensation had been taken, not too little. But the increase in the FICA wage base from $25,900 in 1980, to $127,200 in 2017, coupled with the elimination of the Medicare wage cap, gave rise to the benefits of S corporation distributions. A business owner could limit W-2 compensation to a small amount, and take the remainder of corporate income in the form of S corporation distributions, without paying payroll taxes on the distributions.
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Category: General Business
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