19.03.2023 - 13:05

Dr. Sanders is a veterinarian who is the sole shareholder of Vet Inc., an S corporation. The corporation offers Dr. Sanders’ consulting and surgical services to other veterinarians. Dr. Sanders does not receive regular payments from the corporation, but w

Question:

Dr. Sanders is a veterinarian who is the sole shareholder of Vet Inc., an S corporation. The corporation offers Dr. Sanders’ consulting and surgical services to other veterinarians. Dr. Sanders does not receive regular payments from the corporation, but withdraws funds as the need arises. During the current year, he withdraws $118,000, and the net income of the corporation is $225,000. The corporation does not deduct the $118,000 nor does Dr. Sanders include it on his gross income. Dr. Sanders does, however, report the $225,000 in his gross income. Because Dr. Sanders has recognized all of the corporation’s income, he sees no need to pay himself a salary. He justifies the treatment by arguing that he is not an employee (i.e., he is the owner) of the corporation and that the federal income tax consequences are the same. Evaluate the approach taken by Dr. Sanders and Vet Inc.

Answers (1)
  • Mildred
    April 1, 2023 в 07:54
    The approach taken by Dr. Sanders and Vet Inc. is not appropriate under tax law. As an S corporation, the corporation is required to pay reasonable compensation to its shareholders who also provide services to the corporation. In this case, Dr. Sanders is providing consulting and surgical services to other veterinarians through the corporation and therefore should receive a reasonable salary for his services. Additionally, the $118,000 that Dr. Sanders withdraws from the corporation should be considered as his salary and subject to employment taxes. By not treating the withdrawals as salary, both Dr. Sanders and the corporation are potentially underreporting their income and could face penalties and interest if audited. Ultimately, the approach taken by Dr. Sanders and Vet Inc. is not compliant with tax law and could result in negative consequences for both parties.
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