Connor is the sole owner of Service Enterprises (SE). SE earned net operating income of?

Question

Connor is the sole owner of Service Enterprises (SE). SE earned net operating income of
$90,000 during the year and had a long-term capital loss of $12,000. Connor withdrew $45,000 of the profit from SE. How should Connor report this information on his individual tax return for 2006 if SE is a Proprietor, a C –Corporation ,or a S- Corporation?

Answer 1

Regarding the nature of the $45K: Since Connor is the SOLE owner, is he doing all the work (performing the services)? A shareholder’s share of Subchapter S corporation taxable income is not subject to self-employment tax--HOWEVER, if the shareholder performs services for the corporation, the shareholder must be paid a reasonable wage (subject to FICA, FUTA, and state unemployment taxes).

Answer 2

If a Sole Proprietor:

The $90,000 profit will be reported on Schedule C, and will be subject to self-employment taxes. Remember that one-half of the self-employment tax amount will be deductible on page one of the Form 1040 (go to www.irs.gov and print off a copy of the 1040, SE, Schedule C, and Schedule D, and Schedule E).

The $12,000 long-term capital loss will be reported on Schedule D.

The $45,000 withdrawl will not be reported anywhere.

If a C Corporation:

Assuming that SE has earnings and profits, Connor will report the $45,000 withdrawl as Dividend Income on Schedule B. The Operating Income and the capital loss will be reported by the C corporation on its return.

If an S Corporation:

The operating income will be shown on page 2 of Schedule E as income from partnerships and S corporations. It will not be subject to self-employment tax. The long-term capital loss will be shown on Schedule D. The $45,000 withdrawl will not be shown anywhere, assuming that the S corporation has a sufficient balance in its accumulated adjustments account (AAA).


P.S. - please don't listen to Dee. That answer makes little, if any, sense.