Level 3

S Corp - no contribution, no separate bank account

Forum|Forum|4 years ago
June 14, 2022
3 replies
31 views

I have a customer that opened a S Corp in 2021. Did not use a separate bank account, did not take salary, did not make a contribution to S Corp.

60k income, 80k expenses. Is it fair to have 20k contribution (difference between income/expenses), -20k net loss and no salary/distribution? Just because I need to have something on the tax return.

Second option will be 0 contribution, 80k net loss and 60k taxable distribution (since 0 basis) but that looks too extreme.

I can't find any IRS guidance on this real world situation, but I’s sure he’s not the first.

This topic has been closed for replies.

dkh

Level 15

Did this client have a business - sole proprietorship - before setting up the SCorp? If yes, maybe this business activity should be reported on the Sched C since client clearly wasn't doing transactions as an SCorp. File the 1120S with zero activity for 2021 then make this client understand what is required for 2022 (payroll, corporate bank account, etc)

Does the client have an SCorp election acceptance letter from IRS?

How did the client have a $20k loss without putting money into the business?

qbteachmt

Level 15

"did not make a contribution to S Corp."

I agree with the analysis as to whether the S Corp was "in business" yet, because how can you "do business" without any assets or resources? What you also need to do is examine those expenses, because a person like this will attempt to run everything through the business that they think can possibly be termed as Business, and a lot of that will be personal.

And right now is a good time to find out why the S Corp was formed. We've seen a lot of bad guidance on this. There still is time to dissolve that concept.

"Is it fair to have 20k contribution (difference between income/expenses), -20k net loss and no salary/distribution?"

There is no Fair, in IRS terminology.

Don't yell at us; we're volunteers

A

anabanAuthor

Level 3

It's a new business, no prior activity. He does have activity, just all the income and expenses are mixed with personal, he used his personal bank account.

I removed all the personal expenses. At the end of the year he spent about 50k out of his personal account for the business and received 20k. So for the first year, a 30k loss.

For contribution:

Should I record 50k as an initial "shareholder contribution" (total amount spent) or 30k (difference between income and expense).

For distribution:

Since the payments received went directly in his personal account what is the amount of distribution? 20k total payments received for the business? Or 0 since the business had a loss?

IRonMaN

Level 15

But you didn't answer dkh's question - did he receive an acceptance from the IRS to become a S corp?

If so, it sounds like he has a schedule C for the year and a S corp with zero activity. If he didn't receive the acceptance, he just has a schedule C.

Slava Ukraini!

BobKamman

Level 15

"I can't find any IRS guidance on this real world situation"

That's like saying you can't find any fire department guidance on what to do with the building you put up without the required sprinkler system.

OK, I'm sure @IRonMaN can come up with a better analogy.

Tell us specifically what actions your client took, when. Corporation or LLC? EIN requested? Form 2553 filed? First business activity? First income received? First expense paid?

Some businesses don't require any initial capital. But the $20K deficit suggests both capital and shareholder loans would be involved. Let me guess, he went to a seminar and decided he could DIY. He probably should continue with that attitude, and do his own tax returns. Or at least, not get you involved.

A

anabanAuthor

Level 3

No, it's worse than that, I just did not want to load you with the full picture: he’s gen Z, opened a Delaware C Corp (CA resident) just because saw it on YouTube. I'm serios. 😊

So as of now he is a C Corp, no acceptance letter, I will file 2553 (late) with his first S Corp return. So no schedule C.

He it's a reseller - purchased some items on 2021 for 50 k total, stores them on a warehouse and sold a few for 20k.

Problem is that he is family, and broke, so I can’t pass it to “the CPA”. I’m a bookkeeper, I have fair tax knowledge but this is above my pay grade.

BobKamman

Level 15

Gen Z would never rely on YouTube. He should have depended on TikTok, doesn't take as long to screw up.

So he wants to expense inventory? I always have to look up the rules on that because it's like same-sex marriage, contrary to what I was taught when I was young.

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