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Year-end Tax Accounting Checklist for S Corporations

According to the Internal Revenue Service, S corporations now outnumber all other business corporations. And that makes sense. An S corporation can save business owners big bucks on their income and payroll taxes.

S corporations do, however, complicate a business's bookkeeping. If you're operating as an S corporation, therefore, make sure that you do all of the following before the year ends:

Top-off Shareholder-employee Payroll

When you make the Subchapter S election to have your limited liability company or corporation treated as an S corporation, the Internal Revenue Service sends you a letter of acceptance. That letter doesn't only congratulate you, however. The S election acceptance letter also warns that you must pay shareholder-employees reasonable compensation.

Because S corporations often forget or delay paying shareholder-employees their wages, double-check your payroll records to make sure that you've paid your shareholder-employees reasonable wages by year-end.

Reimburse Shareholder-employees For Business Expenses

Small businesses often display informality in their bookkeeping. And for the most part, that informality is okay. You don't need to do your accounting like General Electric does.

One area where that informality isn't okay, however, regards shareholder-employee business expenses. In order to take an S corporation business deduction for some expenditure a shareholder-employee has made, the S corporation needs to reimburse the shareholder-employee. For example, the S corporation should reimburse shareholder-employees for travel and car mileage expenses before the year ends.

Accordingly, be sure to "settle up" with shareholder-employees (including yourself!) before the year ends in order to put deductions on the S corporation books.

Check Your Pension Plan Compliance

Got a pension plan like a 401(k) or SEP or Simple-IRA? It's a good idea to make sure that you've transmitted any employee contributions to the plan administrator. Penalties abound if you procrastinate about this...

Also, while you're at this, you may want to make or at least begin thinking about making any employer contributions to the pension. In some cases, you can wait to make employer contributions until the corporate tax return due date (usually March 15). But getting this task crossed off your to-do list as soon as possible should make your bookkeeping easier.

Verify Titling of New Assets

A business can only depreciate assets it owns. In order to depreciate a new sport utility vehicle that a shareholder-employee uses as his or her business vehicle, for example, the SUV needs to be titled in the S corporation's name.

For this reason, verify before the year ends that assets the business has purchased are titled in the S corporation's name. Otherwise, you will get into trouble during an audit. IRS agents regularly (and appropriately) disallow asset-related deductions--like depreciation on vehicles--when the asset is titled in the shareholder's name rather than in the corporation's name.

Double-check Borrower Shown on Loans and Leases

Here's a final, really important though tricky point: Be careful if you've been borrowing money to buy depreciable fixtures and equipment.

In order to depreciate assets and deduct all expenditures, an S corporation shareholder needs to have "basis" in the S corporation. In a nutshell, "basis" just means money the shareholder personally invested in the corporation or money that the shareholder lent the corporation.

Here's where the basis thing "trips up" S corporations. If the S corporation borrows money in its name to buy a new piece of machinery, the corporation's shareholders may not have enough basis in the corporation to deduct the depreciation on the machinery. With no basis, then, the shareholders don't get a tax deduction.

Banks and leasing companies, by the way, often don't understand this problem. So you need to be especially careful when borrowing to buy equipment or leasing fixtures.

Talk with your tax advisor now if you think you may have this problem. But know that the basis workaround is simple and time-worn: Rather than have the S corporation borrow the money and then have the shareholder-employee guarantee the loan (the usual arrangement), your tax accountant will want the bank to loan the money to the shareholders (who in turn re-loan the money to the corporation). If necessary, the S corporation can provide a loan guarantee. This arrangement, called a back-to-back loan, does create basis.

About the author:

CPA Stephen L. Nelson is the author of Maximizing Employee Retention Credits.