KMP2025
Level 1
‎02-24-2025 09:18 PM

I have a client who needs to file 2022, 2023 and 2024 1120s. And has the following issues:

  1. They did not pay reasonable compensation for any of those years.  Is there anything you can do to rectify this for prior years? Salary will resume this year (2025) 
  2. The previous preparer had an amount in Loans from Shareholder, which has increased each year as the owner "loans" money to the corp.  Today the total sits at about $135,000 with only one payment of $25,000 made in 2023. There has been no loan agreement or interest paid.  Bookkeeping was also not kept for any of the years.  Now this year they want to treat the Loans from Shareholder as a bona fide loan and start paying interest.  Can this be done? Or would it be recharacterized as additional paid in capital? 
  3. They also have roughly $35,000 in distributions each year from using business accounts for personal expenses.  Distributions exceeded basis in 2023 and 2024.  
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Terry53029
Level 15
Level 15
‎02-25-2025 08:35 AM

Just what I would (IRS would disagree) do is to prepare current year correctly, for 2024 (not allowing distribution to exceed basis), not worry about reasonable salary. Would advise client to do properly in 2025. Make a formal loan agreement with interest for 2025, and not even consider the old loan. Just my opinion some one else may disagree. 

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IRonMaN
Level 15
‎02-25-2025 08:50 AM

I'm not sure what "not even consider the old loan" means.  I agree with the concept.  However, the old loan needs to be added to the new loan with interest starting in 2024.  But when you say didn't take reasonable salary, does that mean he took a small salary or no salary?  If no salary, I would change the 2024 distributions to additional loan proceeds.


Slava Ukraini!
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TaxGuyBill
Level 15
‎02-25-2025 10:36 AM
@KMP2025 wrote:

I have a client who needs to file 2022, 2023 and 2024 1120s.

They did not pay reasonable compensation for any of those years.  Is there anything you can do to rectify this for prior years?  ... they also have roughly $35,000 in distributions each year

Salary will resume this year (2025) 

 

Did the client specifically tell you they were non-wage distributions that were NOT to compensate him for the 'work' he performed?  Unless the client tells you that, your assumption should be that some (or all) of that are wages/salary and that payroll forms were not filed.

I don't know much about this business, but at first glance being taxed as an S-corporation might not be the best option for this taxpayer's business. 

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