What options does one have when their 100 % owned C corporation did
not take out all of the earnings as shareholder salary, and there is
substantial taxable income remaining? This happened for tax year 2001
and 2002, and the C corporation has not yet filed its 2001 or 2002 tax
returns.

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Request for Question Clarification by richard-ga on 29 Apr 2003 05:16 PDT

I don't think you're going to find a workable solution.  Let me know
if you would like me to submit an answer discussing the provision of
the Internal Revenue Code that applies to this case.
Google Answers Researcher
Richard-ga

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Clarification of Question by corky7-ga on 29 Apr 2003 06:50 PDT

Richard,
Thanks for the offer re. the Internal Revenue Code. I am more
interested in how we can fix this situation, or minimize the tax for
the unfiled 2001 and 2002 corporate tax returns, and how best to
handle this situation in the future. If you find any tax planning
techniques, I would be appreciative.

Thanks, 

Corky

Hi Corky7,

One of the things I often find that small corporations
overlook is out of pocket expenses. 

Generally, small C-Corps are often run by an officer, 
or officers, who don't carry the corporate checkbook. 
They pay for things from their own pocket, own cash, 
or their own credit cards. 

If that's what happened in your case, and the principals
did not take deductions for those expenses, have them 
put together expense reports detailing their expenses,
by date. Attach receipts, if possible.

Submit those expenses to the C-Corp, entering them as
journal entries:

Debit the expenses
Credit officer loan

This will not generate any taxable event for the officers.

If applicable, since they haven't been repaid, you should
charge (accrue) interest. Use the Applicable Federal Rates
http://tax.cchgroup.com/taxbuddy/afr.asp

You may be able to increase your travel and meal expenses
by using the Per Diem rates for the area. You will find
links to them here:
http://www.policyworks.gov/org/main/mt/homepage/mtt/perdiem/travel.shtml

For 2001 - Here are the tables:
http://www.policyworks.gov/org/main/mt/homepage/mtt/perdiem/perd01d.html

If you do accrue interest, the officers will need to 
report that on their tax returns. 

Also, look at asset purchases. You may have some items
that still need to be depreciated.

Other than this...staying within the law, there's not 
much you can do for the older years. 

For 2002, if the return is on extension, you might
still be able to fund a SEP-IRA.

Good luck with the returns. 

Best wishes,

Your TaxMama-ga

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Request for Answer Clarification by corky7-ga on 01 May 2003 09:00 PDT

Thanks, but your answer deals with other deductions from taxable
income, but I was asking for options to deal with preventing double
taxation where substantial taxable income was remaining after the 100%
shareholder's salary. In other words, the corporation has always paid
the shareholder a bonus to remove remaining taxable income, but in
2001 and 2002 this was not done due to the corporation not knowing its
taxable income. The returns have not yet been filed, and my question
is what options do we have to correct this error retroactively to
prevent or minimize the double taxation?

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Clarification of Answer by taxmama-ga on 01 May 2003 09:30 PDT

Hi Corky, 

I understand where you're going. 
But if you were to issue a bonus, retroactively, 
you'd be facing:

1) Late filed payroll tax returns and late paid payroll taxes - 
with penalties.
2) Amending prior year personal returns (or filing them late) with the wages.

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Clarification of Answer by taxmama-ga on 01 May 2003 09:44 PDT

Oops. The tab button caused it to post prematurely. Sorry.

You can issue a 'bonus' as a non-payroll item. 

This will reduce the corporation's income for that year. 
But it will transfer the income to the personal return
with all the self-employment taxes (15.3%).

If you haven't filed the personal returns, you can do that.
If audited, IRS might decide that should have been salary. 

Corky, doing this kind of thing is not really good at this
late date. In the long run, this will cause you more grief
with IRS. 

That's why I am suggesting to you that you reduce the income
by submitting the expense reports. Do that properly and you
will find that you will seriously reduce that corporation's
taxable income. 

I'm sorry if this is not the answer you want. But, legally, 
there are no ways to reduce the corporation's income for 
tax years whose filing date have passed, without creating 
other problems. 

If you really want to be aggressive - take the bonus as a
freelance or consulting fee, as mentioned above. This will
zero out the corporation's income. 

You will pay tax on that income on the personal level, with
all the self-employment taxes. You will also pay all the 
late filing and late payment penalties on that income.

So, basically, it's 6 of one, half a dozen of the other...

I just looked up net operating loss carrybacks, in case you
wanted to try that strategy for this year. But the code
is no longer allowing C-Corporations to take a deduction
for NOLs... It was a thought. 

Sorry not to give you better news. 

Best wishes, 

Your TaxMama-ga

Taxmama's follow up to my clarification was well thought out. Thus, 5 stars.