Recharger.com

Too Much or Too Little?

by Mark Battersby · for Recharger Magazine · April 1, 2008 - page(s): 54-59

Few, if any, business owners believe that they are adequately compensated for the time and effort they contribute — or have contributed — to make the operation successful. How best to compensate yourself as the owner of a U.S. business is a difficult question to answer, especially under the watchful eye of the Internal Revenue Service.

Leave money in the business to avoid tax and the IRS often sees — and penalizes — “accumulated profits.” Too much compensation for a business owner/shareholder may mean that dividends were ignored resulting in a distorted tax bill. Recently, the IRS has been directing its focus to the compensation of owner-employees of businesses operating as S corporations.

What is an S corporation?

An S corporation is an incorporated business with a limited number of shareholders (75 or fewer) that chooses or elects not to be taxed as a regular or C corporation and meets a number of other requirements imposed by our lawmakers. Shareholders in S corporations generally include on their personal income tax returns their pro rata share of the S corporation’s capital gains, ordinary income, tax preference items, etc.

In other words, an S corporation is a pass-through type of business entity, much like a partnership, that avoids corporate double taxation while providing limited liability for the shareholders in the office products recycling business. Double taxation means that profits are taxed not only at the corporate level but, again, at the shareholder’s level when those same profits are passed along to his or her personal income tax return. Dividends distributed to shareholders cannot be deducted by the incorporated remarketing business.

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