Level 3

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Form 1120 and how to tax Owners Draws

Forum|Forum|6 years ago
January 22, 2020
13 replies
130 views

Hello All,

I need help please...... I have a new Client that is a 2 person C Corp 1120 with subcontractors that will all get 1099-Misc.

They 2 owners did not start payroll until September. I know I can deduct the W2 Salary as a business expense, but what about the Draws they took the rest of the year.

I am seeing that cannot be a tax deduction unless they are on Payroll? Thank you in advance,

Sharon

ProSeries Professional

This topic has been closed for replies.

Best answer by abctax55

Just a few problems with your understanding C-Corps.

1) They don't have "owners"; they have shareholders.

2) The "employees/owners" ie, those that provide services get wages (W-2).

3) Money paid out to these "owners" (your description) is either a loan, or a dividend. So a Form 1099-Div should be filed. Dividends are NOT deductible at the corporate level, but are taxable to the recipient. Thus the reason that closely held corps are usually not C-Corps.

Report back if you really meant this is an S-Corp as the rules are a bit different

IRonMaN

Level 15

Corporations don't have draws. If they took "draws" before they started payroll, they were actually taking payroll. You need to go back and amend and/or file payroll tax returns to correct for the snafu.

Slava Ukraini!

abctax55Answer

Level 15

Just a few problems with your understanding C-Corps.

1) They don't have "owners"; they have shareholders.

2) The "employees/owners" ie, those that provide services get wages (W-2).

3) Money paid out to these "owners" (your description) is either a loan, or a dividend. So a Form 1099-Div should be filed. Dividends are NOT deductible at the corporate level, but are taxable to the recipient. Thus the reason that closely held corps are usually not C-Corps.

Report back if you really meant this is an S-Corp as the rules are a bit different

HumanKind... Be Both

SharonAnnAuthor

Level 3

Hello and thank you for responding,

Ok yes, correct they are shareholders, not owners. It s not an S Corp

Maybe I don't understand as much as I thought. I am new to from 1120

However, They had someone else do thier 2018 taxes and they did not have payroll. They just withdrew money all year and wrote themselves checks. Last year and that Tax Preparer deducted all of the cash withdrawals and checks they made on line 12 Officer Compensation of the 1120.

This tax year 2019 , they started payroll in Sept, but they still withdrew 100K in cash and checks and I want to be sure I do it correct.

Would the 1099-Div come from QuickBooks? I did thier 2019 Bookkeeping

Thank you again

qbteachmt

Level 15

Do they work for the corporation? Perhaps they did no work for the corporation until Sept 2019?

Or, do you simply have three errors:

1. "They had someone else do thier 2018 taxes and they did not have payroll."

2. "They just withdrew money all year and wrote themselves checks."

3. "Last year and that Tax Preparer deducted all of the cash withdrawals and checks they made on line 12 Officer Compensation of the 1120."

Because you might want to address 2018, too...

Don't yell at us; we're volunteers

M

mlhp

Level 4

Payroll or an employee loan. The loan needs to be documented, interest at AFR. Dividend treatment - thats an option as well....

Seems like they didn't know why they chose the entity structure they have and how it works.

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