November 19, 2011
If the corporation has more than one shareholder - distributions need to be based on ownership percentage
If your corporation has more than one shareholder, it is very important that distributions be based on ownership percentage. Distributions can be taken out of the corporation if the shareholder has tax basis in the corporation. Distributions include cash or other payments made by the corporation on behalf of shareholders. For example,a corporation can pay life insurance premiums for shareholder. But if the corporation has more than one shareholder, and the corporation pays benefits for only one shareholder but not another, you have technically violated the S corporation rules and your S election could be terminated. Please call us if you have questions on this important topic.
If you don't pay yourself a reasonable salary, the IRS may recharacterize your distributions as salary and assess additional tax, interest and penalties. We can help you with this issue. Another resource to use for reasonable compensation can be found at this web site: www.bls.gov. In general, you need to pay yourself compensation via a W-2 that is equivalent to the amount you would have to pay someone to do the job you do in your S corporation.
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