 Follow
calendar year for S corporation
|
 Dear
Tax Talk,
We formed a corporation in April 2005. The proper form was also
filed to elect Sub-S status. Will our fiscal year be April 2005
through April 2006, or can we file a tax return for the year ended
Dec. 31, 2005? Also, there will be a loss, so must the one stockholder
take a salary in fiscal year 2005? Thank you.
-- Kaycee Johnson
 Dear
Kaycee,
A subchapter-S election means that the stockholders of the corporation
pay tax on its earnings or include its losses on their personal
returns. Since most shareholders of S corporations are individuals
who use the calendar year for reporting taxes, the S corporation
also must use the calendar year, unless it meets certain narrow
exceptions. These narrow exceptions may unnecessarily complicate
the company filings, and therefore most S corporations stick to
the calendar year. This means that you'll be required to cut off
your income and expenses as of Dec. 31, 2005 and every year thereafter.
Stockholders of an S corporation are required to take
a reasonable compensation for their services so that payroll taxes
are not avoided. Payroll taxes are avoided in an S corporation when
the stockholder takes dividend distributions that are not subject
to payroll tax in lieu of salary. It is not unusual in a startup
or loss company for an officer-stockholder to forgo salary during
the startup or loss period. For example, some CEOs take $1 in salary
to turn around a company. In order to fund the losses, the company
has to be either borrowing money or the stockholders need to be
contributing capital.
In my opinion, it would not make sense to borrow or
contribute additional capital to pay a salary if the stockholder
is not taking dividend distributions. In fact, by contributing additional
capital to pay salary, the stockholder is taking after-tax dollars
and making them taxable again.
|
