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August 22, 2005
S corps
Forbes.com is running an article on IRS investigations into potential tax evasion through S corporation structures. According to Forbes.com, the IRS says the tax shortfall was $300 billion in 2001.
In a nutshell, people set up S corporations to avoid double taxation of profits, once at the corporate level, once after dividends are distributed. S corporations don't get taxed at the corporate level, but instead all the tax is paid by owners on the gains made in dividends. Or the losses made, which are also passed on directly. Presumably if you're a big enough fish and wise enough, you can then use the losses to offset other gains you made. That of course logically doesn't do you any good... unless you need to reduce the size of the capital gains you have to pay tax on.
All of that is legit, although as Forbes.com recommends, "You will want an attorney." The laws get complicated. The investigations do not address the legitimacy of the legit part of course, but instead concern salaries and overstated losses. Some folks surmise there may be owners adjusting salaries to limit their tax burdens, and a few may even be claiming they lost more than they did to offset gains elsewhere.
Gee if I were an owner, I'd tend to see this as an advertisement rather than a warning.
Posted by Mark at August 22, 2005 08:23 AM