Monthly Archives: September 2016

The IRS can reclassify S corporation distributions as wages

If you run your business as an S corporation, you’re probably both a shareholder and an employee. As such, the corporation pays you a salary that reflects the work you do for the business — and you (and your company) must remit payroll tax on some or all of your wages.

By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings from classifying payments as dividends rather than salary may be even greater than it once would have been.

IRS audit target

But paying little or no salary is risky. The IRS targets S corporations with owners’ salaries that it considers unreasonably low and assesses unpaid payroll taxes, penalties and interest.

To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, comparable industry studies, company financial data and other evidence. Spell out the reasons for compensation amounts in your corporate minutes. Have the minutes reviewed by a tax professional before being finalized.

Prove a salary is reasonable

There are no specific guidelines for reasonable compensation in the tax code or regulations. Various courts, which have ruled on this issue, have based their determinations on the facts and circumstances of each case. Factors considered in determining reasonable compensation include:
• Training and experience,
• Duties and responsibilities,
• Time and effort devoted to the business,
• Dividend history,
• Payments to non-owner employees,
• Timing and manner of paying bonuses to key people, and
• Compensation agreements.

Ascertain the right mix

Do you have questions about compensation? Contact us. We can help you determine the mix of salary and dividends that can keep your tax liability as low as possible while standing up to IRS scrutiny.

© 2016

Lower gas costs = lower business driving tax deductions

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business went down. The reason? Compared with last year, the cost of driving is less because gas prices are lower.

Two options

If you use a vehicle for business, you can generally deduct the actual expenses attributable to your business use. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle, based on the percentage of business use. However, depreciation write-offs are subject to “luxury car” limits.

But some taxpayers don’t want to keep track of actual vehicle-related expenses. Another option: You may be able to use the IRS’s standard mileage rate. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

This year’s rate

Beginning on January 1, 2016, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 54 cents per mile. For 2015, the rate was 57.5 cents per mile.

The cents-per-mile rate is adjusted annually by the IRS. It is based on an annual study commissioned by the IRS about the costs of operating a vehicle.

Current gas costs

On June 15, 2016, the national average price of a gallon of regular unleaded gas was $2.36 and it fell below $2 a gallon earlier this year. This is down from the average price of $2.80 per gallon a year earlier. (There are variations in fuel prices from one state to another so the per-gallon price in your state could be higher or lower.)

Going forward

Not all taxpayers can use the cents-per-mile rate. It depends on how they’ve claimed deductions for the same vehicle in the past.

If you have questions about deducting mileage expenses in your situation, contact us.

© 2016