What are your plans for the dog days of summer? Here’s a suggestion: Take advantage of the slower pace to begin tax planning for your S corporation.
- Compensation. Start by making sure you’re on track to pay yourself a reasonable amount of compensation for the year. What’s reasonable compensation? The answer depends on several factors, including the services you provide to your business, the size of your business, and compensation paid in similar businesses.
- Basis. Next, update your basis information. Among other things, your basis in your S corporation determines whether you can take nontaxable distributions, or draws. If your distributions exceed your basis, the result is a capital gain on your personal return.
- Loans. Finally, document loans you make to your business. This applies to loans you’ve made in the past and loans you may need to make currently to establish additional basis. Include an interest rate and repayment term in the loan document, and update corporate minutes to reflect authorization of the loan.
Why bother? Without documentation, loans could be considered distributions to you, or, in some cases, treated as a second class of stock. As you know, having more than one class of stock can invalidate your Subchapter S election.
Give us a call for more planning ideas, such as a review to make sure your business is in compliance with the Affordable Care Act.