S-corp tax deductions on personal income ?
Hi, I am trying to setup a small business in CA with 2 other partners and thinking of doing a S-corp. We will each put in some money say k in the company and have an equal split. Here are my questions:
1. Since we are officers in the company, are we required to pay a salary, I saw someone mentioned k is the minimum.
2. It’s very likely that the company won’t make enough profit to pay 3 x k. Are we allowed to take smaller salary?
3. Assuming we have a net loss for the first year, and I understand S-corp’s profit and loss will flow through to your personal tax income. Does it mean that I can deduct the loss from my income that I earned from my previous employer?
4. I heard someone said that we can deduct up to 3 years of your personal income. Is that true? i.e. if the new company lost k this year and assuming a equal split. Can I deduct the k from my tax return in 2008, 2007 and 2006?
Thanks!
-Mr. Beacon
Tags: 3 years, money, personal income, personal tax, profit and loss, s corp, salary, small business, tax income, tax return
#1 written by v b June 8th, 2010 at 08:39
1. The minimum salary is one that is commensurate with your work. $0 is not reasonable. $1000000 is not reasonable. There is no magic number as the amount is what you are worth if someone else hired you for the same amount of time.
2. Lack of profitability does not mean you can lower your salary. (If you want that, set up a partnership.)
3. You ability to deduct a loss is limited by your cost basis in the s-corp.
4. See #3. The 3 year rule applies to figuring out if you are really a business or not.