Small Business Reading Room

Thursday, September 06, 2012

What does the IRS look for when reviewing S-Corporation tax returns?

Ok, so as you know that  Delaware Intercorp, Inc. doesn't provide tax advice. That being said, we do have the occasion to work with professionals who do. Generally speaking, information comes at not cost, and you have to pay for advice! Information is still a powerful tool when it comes to planning for your S-Corp. 

This information was provided by a tax preparer who in an effort to keep you informed of issues the Internal Revenue Service is emphasizing when reviewing S-Corporation tax returns, and would suggest that you review the following items:

1. Reasonable compensation of shareholders. 

Many S-Corporation shareholders have paid reduced salaries in an effort to minimize the amount of Social Security and Medicare taxes due. The IRS has indicated they will be evaluating whether the
salaries paid are reasonable based on the duties and hours worked by shareholders and whether lower salaries are merely to reduce Social Security and Medicare costs. From a shareholder perspective lower salaries will also affect the amount of Social Security benefits you are entitled to at retirement.

2. Medical Insurance premiums paid by S-Corporations for more than 2% owners.

The IRS requires the cost of medical insurance premiums to be included in gross taxable wages of S-Corporation shareholders. They do not need to be included in Social Security or Medicare taxable wages. (If you use a payroll service or prepare your own W--2's please make sure this is handled properly or the deduction allowed for self-employed health insurance may be disallowed.

3. Auto Usage. 

While this is not specific to S-Corporations, it is recommended that you maintain auto logs on all vehicles that have an element of personal use.

4. 1099 Filing. 

The IRS is stressing comprehensive filing of all required 1099's. Failure to file can result in a penalty of $370 per 1099 not filed.  It is a good idea to start gathering this information now! If you require all landlords and service providers you deal with to complete W -9 prior to providing payments to them and file Form 1099's for all rents and contract services you paid, you will get a jump on this before tax season starts.

While no one bit information should be relied on for your specific situation without the advice of a CAP, if you are proactive in addressing these issues it is less likely you will have to address these items as part of a future audit!



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Delaware Intercorp, Inc.
113 Barksdale Professional center
Newark, DE 19711-3258

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