Is this a loophole or fraudulent?

Question

You own an LLC business (sole owner,100% shareholder), you file as an S Corporation for tax purposes. (not self employed)

Now you have a W2 as you pay yourself wages as an employee.
You also take cash from the profits from the business.

On the W2 only the payment received as wages are listed.
On the personal tax return, only wages are listed as income.
On business tax return you do list the profits/dividends you received (non taxable).

Now when it comes to show your proof of income to someone, or have to show your W2 to prove income, like for discounts, grants and alike, why doesn't it show your non taxable income from other means, like through the business?
Surely this can't be right? Companies, agencies don't ask you for other proof of income, usually just your W2 or personal tax return. This meaning it is not showing your true income and they won't know about it.
Have I got this right or is there something fraudulent about all this? Or is it a loophole for LLC owners?

I understand it is income, but does an LLC filing as an S Corp have to declare the non taxable money(income) that he takes from profits etc written on his/her own W2 and personal tax return too?

Answer 1

I'm sorry, but the previous respondents don't know what they are talking about. The wages are a deduction for the LLC on their tax return in arriving to income. This net income then flows through to the LLC member. It must be reported on Schedule E as LLC income in addition to the wages being reported on Page 1 of the 1040. You can then take tax-free distributions from the LLC to the extent that you have basis. This is seen as a return of previously taxed capital (taxed on your Schedule E as earned by the LLC). If you need to prove this for any reason, you could back up your salary with a W-2 and the LLC income and distributions with the Forms 1120S (including Schedule K-1) and your own 1040.

Answer 2

Let me start by saying that I am a CPA and that Tax CPA and Steven F are the only ones that posted anything resembling a correct answer.

But let me see if I understand you correctly - Are you asking if you can report the cash you withdraw from your LLC as "Other Tax Exempt Income" when applying for a loan or grant? The answer is NO. Its sometimes hard to understand but that cash you pulled out has already been taxed (when you included the associated income on your return). For example, if the LLC makes $1000 one year and you withdraw $900 in cash, than you paid tax on $1000 but only got $900 in cash. That cash is NOT Tax exempt income, it is previously taxed income. Hope that helps... I know tax laws are clear as mud sometimes, but if it sounds too good to be true than it usually is.

Answer 3

ALL earnings of the S-corp, whether taken out or left in the company are included in YOUR individual income in the year they are earned. There is no non-taxable income in this situation. The 'loophole' you refer to does not exist.

Tax CPA is the only accurate answer above mine.

Answer 4

although it is a sole trader, any profits that the company do not actually belong to u personally. therefore when u take money from the profits, it is classed as drawings and hence part of ur salary which must be declared. if u don't...

Well, just declare it!

Answer 5

Cash taken from profits would also be income. When the IRS finds out you took money from that without declaring it, I wouldn't want to be in your shoes.

Answer 6

Sounds dodgy to me. Looks like tax evasion.