qbteachmt
Level 15

There is no "supposed" to be split. It's "supposed" to pay reasonable compensation for services, so marketplace wage. Not a Split of any specific type. What the IRS doesn't want to see is all distribution and no payroll for the shareholder. That's because the Supreme Court ruled that corporations are their own separate entity. The corporation needs to hire a human to do the work. That human is an employee. That means payroll.

Yes, an S Corp is not forced to make distributions. But that is a pass-through entity. Taking or not taking the excess money is not the taxable event. Making profit is the taxable event. Whether the "excess" money is held in the entity's bank account or distributed or spent on inventory, the entire (net income) of that corporate year still is taxed, because it got generated in a taxable manner, and this entity is taxed on that money. What you call the excess as retained earnings, is not the taxable amount. It's from the full taxable amount.

 

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