re: Wife Started a LLC / S Corp

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baldona

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It's a grey area, and honestly not worth arguing about in this thread. You'll find cpas who are aggressive and comfortable assigning a solo provider of services a "reasonable" salary and dishing the rest out as profits and other more conservative cpas who wouldn't touch doing that with a 10ft pole.

But as I already mentioned, with the qualified business income(QBI) deduction that came with the 2017 TCJA, this greatly decreased the advantages thay came from sole prop assigning themselves a lower reasonable salary and profit sharing. Now, For many sole props, it doesn't make financial sense to switch to a s corp until profits are above the phase out for the QBI. Fat bastard always touts the s corp in these types of threads, and maybe because he is in real estate and theres nuances that for him a s-corp makes the most sense. But as with most things, it can vary on a case by case basis and useful to have a cpa review and crunch the numbers and make.sure that choosing a scorp is the right financial move.

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Fat bastard always touts the s corp in these types of threads, and maybe because he is in real estate and theres nuances that for him a s-corp makes the most sense

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I hope not, because an S Corp is an absolutely terrible place for real estate (although if you are managing real estate vs owning it, can make some sense)

Look if the IRS ever was serious about raising money via enforcement, they would allocate some agents to going after single owner, single employee S corps that are invovled in professional services. The reasonable salary rules are abused to an insane level.

Here is a real life example I saw last week, all of this prepared by a CPA (not me).

Individual is an engineer. Gets a 1099 issued to him personally for $215K.

Tax preparer puts this on a Sch C, then takes a deduction for $215K, with a notation that this is nominee income over to an S Corp.

S Corp return shows $215K of other income, with nominee over notation. S Cor takes $70K in expenses... about $65K in travel and the rest professional fees. S Corp then also takes a $24K deduction for shareholder wages. S Corp has no other employees or expenses. S Corp reports $121K in net income.

Back to the 1040, the 1040 picks up $121K in S Corp income. 1040 does NOT pick up W-2 wages. Instead, a SECOND Schedule C is on the 1040, reporting $24K in gross revenue and no expenses. THis $24K is subject to S/E tax.

So, the CPA blessed an engineer who truly netted, after expenses, $145K in "income", having reasonable salary of $24K. Then that $24K wasn't even run through payroll. (Client said he's never run payroll). I'm not even going to discuss whether or not the $65K in travel was legit.

IRS would have a super easy win here if he were audited. But it might take some actual audit work on behalf of the IRS to do so.

So yes, some CPAs are much more aggressive than others.