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Taking Cash Out of An S Corporation

 
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Baal-zebub
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Joined: 01 Jan 1970
Posts: 124
PostPosted: Fri May 19, 2006 8:11 pm    Post subject: Taking Cash Out of An S Corporation Reply with quote
<p>If you own an S Corporation, at some point you may be faced with the dilemma of taking distributions out of your business or taking a salary. </p>

<p>In the eyes of the IRS the distinction is important, because salaries require paying income tax on them and also are subject to withholding taxes. Distributions, on the other hand, have no such tax implications.</p>

<p>But if you think the easy answer is to just call everything a "distribution," well then the IRS has news for you. You have to meet certain guidelines, including:</p>

<p>1) Zero salary is a red flag. </p>

<p>2) Many CPAs advise their customers to play it safe by following the 60/40 rule: take 60% as salary and 40% as distributions. </p>

<p>3) Distributions must be pro-rata (i.e. based on ownership percentage). </p>

<p>4) Distributions can not exceed profits for the year. </p>

<p><a href="http://www.vanilla-accounting.com/blog/archives/000126.php#more">Via the Vanilla Tax Blog</a>.</p>

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