Any accountants/CPA's here?

[Monkeyleg]

My accountant died last year, less than one year after he finally retired at age 72. His son had been brought into the business several years ago, and now heads up the company.

The father had always told me that any money I loaned to myself as an officer of the C corporation I run would be treated as taxable profits, as said monies would not show as expenses. In years where I loaned myself money from the corporation, I either repaid the loans by year's end, or additonal taxes.

The son is saying that the corporation has $XX,000 in retained earnings from taxes the corporation has paid in the past, and that those retained earnings could be used to offset any money the corporation has lent me this year. IOW, he's saying that the corporation won't owe any state or federal taxes on loans made to me because of the retained earnings.

This is beyond my knowledge of taxes.

So, who's right: the father or the son?

If it's the father, I'd rather start working on reducing the corporations tax liability now than get hit with a surprise come March 15th of next year.

Any replies/opinions much appreciated.

[Monkeyleg]

Well, nobody replied, so I called the IRS. The agent put me through to someone in the legal department.

Just a bit of advice: don't ever talk to someone in the IRS legal department. I got off the phone 1000% more confused than I was when I called.

And now I'll probably get audited.

[Tallpine]

sorry, I've been out of it for so long now that I don't remember...  and the rules keep changing so what I remember is probably wrong.

But I seem to recall that if the loan is set up properly, with you repaying with interest to the corporation, that it can be just a regular (not-taxable) loan.  It's kind of a grey area like "hobby businesses" where you have to do everything just right and then some.  Otherwise it's just a taxable earnings distribution.

There is a public accountant over on THR.  IIRC his user name is "STW" - you might PM him.


edit: I've never encountered that retained earnings concept related to loans to stockholders.  R/E is just assets that the corp has chosen not to distribute (usually in order to grow the company).  It doesn't mean that there is even any cash to distribute - it might be all tied up in fixed assets, inventory, etc.  Remember, as a C corp you are subject to "double taxation" - corp earnings are taxed, then distributions to stockholders are taxed as well.

[HankB]

You can probably get "some" free advice here: http://www.allexperts.com/browse.cgi?catLvl=3&catID=932

I had a question about responding to an IRS inquiry about my taxes from a couple of years ago, and got an answer quick. (It all came out OK, case closed, no additional tax or penalty.)

[TaxPhd]

Several things here don't really make sense.  It might be what was explained to you, or your understnding of it.

The father had always told me that any money I loaned to myself as an officer of the C corporation I run would be treated as taxable profits, as said monies would not show as expenses. In years where I loaned myself money from the corporation, I either repaid the loans by year's end, or additonal taxes.

The only reason you would be subject to tax on a loan from the corp is if a market rate of interest wasn't paid.  

Loans don't "show as expenses."  But that doesn't make them taxable profits.  Something isn't clear here.

The son is saying that the corporation has $XX,000 in retained earnings from taxes the corporation has paid in the past, and that those retained earnings could be used to offset any money the corporation has lent me this year. IOW, he's saying that the corporation won't owe any state or federal taxes on loans made to me because of the retained earnings.

This really doesn't make any sense.  Paying taxes does not create retained earnings, and the existence of retained earnings doesn't remove tax liability.

If you could get some clarification, I might be of more help.




Scott

[Monkeyleg]

Thanks for the reply, Scott.

I'll try to make this as clear as I know how to do. (It was sooooo much easier operating as a sole proprietorship many years back).

Monkeyleg, Inc. has three sources of income from three different business ventures. All checks are made payable to Monkeyleg, Inc, and all get deposited into the same corporate checking account.

Monkeyleg, Inc. has expenses that can be written off on the Form 1120: health insurance, liability insurance, vehicle expenses, office supplies, etc.

However, for the past nine months, I have not given myself a paycheck, nor withheld federal, state, or FICA and co-FICA taxes. Instead, I have written myself checks every month which I have said are loans from the corporation to an officer of the corporation (me).

As I mentioned before, my previous accountant said that such loans would not offset revenue to the corporation, as they were just that: loans. He said that revenues minus expenses = annual profit. And that such annual profit was fully taxable at state and federal tax rates.

His son is saying that the retained earnings of $XX,000 that the corporation is showing will offset the loans made to me (officer of the corporation) for this year, because those earnings have already been taxed.

The IRS legal person said that how the disbursements of retained earnings are treated will determine the corporation's or my own personal tax liability: are the disbursements dividends, payment to an employee, or some other form of disbursement?

I don't know if the information I've given above is sufficient for you to form an opinion.

All I know is that I don't like surprises come tax time.

Back in 1991, thanks to the lax attitude of my former accountant, I got hit with a personal tax liability that was $30,000 more than what I was told it would be, or what I was expecting.  (Yeah, try coming up with $30,000 from the cookie jar to give the IRS for personal taxes).

Needless to say, I've tried to make sure that from then on out, I've been trying to stay as close to a zero-sum game as I can with the revenue services.

[TaxPhd]

However, for the past nine months, I have not given myself a paycheck, nor withheld federal, state, or FICA and co-FICA taxes. Instead, I have written myself checks every month which I have said are loans from the corporation to an officer of the corporation (me).

As I mentioned before, my previous accountant said that such loans would not offset revenue to the corporation, as they were just that: loans. He said that revenues minus expenses = annual profit. And that such annual profit was fully taxable at state and federal tax rates.

That is correct.

I am assuming that Monkeyleg, Inc. is closely held?  Why aren't you taking salary/bonuses to drive the corporate income to zero?  There may well be legitimate reasons for not doing this, but you will know if you are in that situation.

His son is saying that the retained earnings of $XX,000 that the corporation is showing will offset the loans made to me (officer of the corporation) for this year, because those earnings have already been taxed.

There must be something lost in the translation here, as this still makes no sense.  Distributions from previously taxed earnings have a different tax treatment, but that is an issue with an S corp. that was previously a C corp.  Not the situation here.  I don't see how retained earnings can keep you from being currently taxed.

The IRS legal person said that how the disbursements of retained earnings are treated will determine the corporation's or my own personal tax liability: are the disbursements dividends, payment to an employee, or some other form of disbursement?

This is true, but it is a pretty poor explanation.  The taxability of distributions is dependent on E & P (Earnings and Profits).  Depending on the amount of E&P (or lack thereof), distributions can be fully taxable, taxed at capital gain rates, or treated as a non-taxable return of capital.  Now, E&P is kind of similar to (but not the same as) retained earnings, and the two are not the same.  This may be what the son is referring to.

You might want to look for opinions from other accountants, looking particularly at one who can clearly explain what is going on.  




Scott

[Monkeyleg]

"...or treated as a non-taxable return of capital.  Now, E&P is kind of similar to (but not the same as) retained earnings, and the two are not the same.  This may be what the son is referring to."

Thanks again for your reply, Scott. My current accountant said that the distribution of retained earnings would be treated as a return of capital.

Is he right? I don't know. Won't know until March 15th.

Over the past 19 years, I've had very good attorneys, and very bad attorneys. I've had one very good accountant, and one very bad accountant.

The problem is, I didn't know if they were good or bad until after the fact.

[Tallpine]

"His son is saying that the retained earnings of $XX,000 that the corporation is showing will offset the loans made to me (officer of the corporation) for this year, because those earnings have already been taxed."

I think the son is on drugs ...