Corporations

[CLAUDIATRACY]

My client is a real estate broker who hasn’t had any sales for several years and always has filed a return with zero activity. Last year, she received commissions from 2 sales for about $12,000, which she deposited in the corporate account. In 2021 she withdrew $5,000 from the account and in 2022, she withdrew $6,000. How do I handle this on the return?

[jeffmcpa2010]

 C Corp or S Corp?

[IRonMaN]

Wages and hopefully a W2 has already been filed for both years so they don’t have to be filed late now

[CLAUDIATRACY]

C corp

[jeffmcpa2010]

In my opinion, The Corporation should either file the forms to report the payment as W-2 Wages, or file a 1099-Div to report the payment as a Dividend to the shareholder. (unless of course there were some prior loans from the shareholder to the corp. that were still outstanding.)

W-2 wages may be more correct, but I don't have enough information about time involved in the transactions by the owner, etc. that might help determine if the payment was for work, or more of a return on investment. 

[IRonMaN]

Commissions makes it sound like someone did some legwork.  Legwork sounds like work and work sounds like W-2, so I'll stick with my original answer.

[CLAUDIATRACY]

At this point, I would lean toward doing the Dividends, as I don't think this person would relish the idea of getting involved in payroll taxes, knowing that she may never have another sale. If I were to go that way, would I do 1099s for 2021 AND 2022? If I do one for 2021, do the remaining funds become retained earnings?

To say the least, this is a difficult client--maybe not the return, but the person. I haven't done corporate returns on a regular basis and finding someone else to do it has been an impossible task this morning.

[jeffmcpa2010]

Just remember.

The choice to work with "difficult clients" is yours.

Most Accountants Liability classes that I have taken, stress that "difficult clients" also tend to be the highest liability risk.

Tell them to take a hike. I the time you spend researching/worrying about this, you could have completed a few other returns.

Also - It is not your responsibility to find another preparer for work they ask for that you do not normally do.

[qbteachmt]

"as I don't think this person would relish the idea of getting involved in payroll taxes"

But that should have existed all along, for a Corporation. That isn't new, just because there were years without activities.

"knowing that she may never have another sale. If I were to go that way, would I do 1099s for 2021 AND 2022?"

You cannot send a 1099 to yourself from your own entity unless the work you did was for some different business you run, providing services to your own other entity. Remember the Corporations are "people" according to the Supreme Court. She is that C Corp's employee for the work she does that is their operations.

Dividends are paid to shareholders that do no work for the entity, but have an ownership holding of the stock shares.

Perhaps the two of you need to get together and decide how to close out this Corporation?

[MC82]

Hi Claudia, I will give my opinion, but like everybody said do not take it as a fact, consult with a specialist in taxes.

If your client had a C Corporation, the $12,000 deposited in year 2021, had to be declared the whole amount in 2021 on the C Corporation tax.  I really think that should be done the correct way and  go back and issue or correct  941's of 2021, pay the withholding amounts from the salary  and issued the w-2 for the whole amount of $12,000 for year 2021( because my understanding is your client works for that money, so social sec and medicare as well as taxes should be withholding). It does not matter the year, or the way that you client  withdraw the money, the fact is that the whole amount are commissions (revenue) and  were earned in 2021, and should be declared and pay the taxes on 2021.

Also, it does not matter,  if your client  lend the money to the Corp before, the entries are revenue and needs to be declared as earnings and pay taxes. Good luck! 

[qbteachmt]

This is good, but not quite: "It does not matter the year, or the way that you client withdraw the money,"

Yes, especially for a C Corp, it does. Ford Corporation's employees don't get to take money whenever they want, and don't leave their own money in the corporation. This entity structure means that is the C Corp earnings. Why someone created a C Corp for this activity, would be a different discussion. Perhaps they assumed it would be Real Estate operations, including sales, ownership of property, this person has a Broker License and expected to have employees (agent, marketing, receptionist). We don't know that part.

"the fact is that the whole amount are commissions (revenue) and were earned in 2021"

For the C Corp. That is put on the 1120.

"and should be declared and pay the taxes on 2021."

And any taking she did, in each year, is Payroll. So, you have two years of payroll here.

[CLAUDIATRACY]

A FINAL UPDATE

This C-corp had not had any income since it’s inception, so the broker, who thought she knew taxes decided that she would file her own returns and just mark them with no activity! We filed a 2553 to elect to file as an S-Corp and hope that it will be approved.  Since she had never consulted a tax professional, she had never received any advice from a knowledgeable person.

Thanks for all your responses and help!

[qbteachmt]

"to elect to file as an S-Corp"

Nothing in this topic is changed by that election.

S Corp is required to have Payroll for anyone that works for the business, including any shareholder-employee. S Corp does not have an Owner. There is no such thing as Draws or Dividends.

S Corp does not send a 1099 to its shareholder for work performed for the S Corp. It is supposed to be payroll. Those takings are payroll whether the entity is S Corp or C Corp, for the employee. But the Corporation (either formation) had the entire amount as Income in the year paid to the entity.