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How I did my 2018 S-corp income taxes

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  • hdo hdo 
    Participant
    Status: Physician, Small Business Owner
    Posts: 11
    Joined: 01/14/2019

    EDIT FOR DISCLAIMER: 2 CPAs agree (at least after a quick glance over) with the approach I’ve taken below but at least one (Johanna Fox) disagrees; please see her great comments below. I am not an accountant and this information may or may not be reliable or misleading for you. It’s just how I did my own S-corp taxes in 2018 based on stuff I read on the Internet and in IRS publications.

     

    First post on this forum but long-time lurker. Posting this in hopes it will be helpful to someone, and I welcome corrections as well. Could find no examples on the net of a completed 1120S in the wild and no good discussion of how it’s supposed to integrate w/ 1040 and other big-picture tax issues. Decided not to use a CPA or Quickbooks to do this because (1) I’m a cheapskate and (2) my understanding is that QB for Mac does not support 1120S. I did have all my paper tax forms checked by a CPA and he had no issue w/ any of them.

    My situation:

    – 2018 was my first year as an EM attending (finished residency in Jun) and also my first year as a 1-member LLC. But will file as sole proprietor starting in 2019 as it should save me ~6K on my taxes vs filing as S-corp again due to the way QBI is defined

    – gross 2018 1099 income was $226,791, all through the S-corp

    – My LLC has 401(k)+profit sharing and cash balance plans w/ VG; goal was to max out these as well as my family HSA and all other tax-deferred accounts. Per my actuary, my S-corp salary needed to be >=$220K in 2018 to do this. 401(k) employER limit was $13.2K per my actuary; reduced from standard limit of $36K due to existence of the CBP. In all, the amount I contributed through the LLC to pretax accounts was $13.2K 401(k) ER + $84.9K CBP = $98.1K total, which was close to my limit.

    – gross S-corp income $226,791

    – wife and I are filing jointly and had 4 W-2 jobs in 2018 as well; my 401(k) EE contribution and wife’s 403(b) and my HSA (but not wife’s HSA) came off those W-2s

    – of course I filed quarterly 941s throughout 2018 and so all Medicare+SS tax is already paid

    THE FORMS

    FORM 1. W-2/W-3; can generate online at BSO, https://www.ssa.gov/employer/; filing due date was 1/31

    – Line 1, wages etc: 220,000 by definition, ie before 401(k) ER/CBP or any corporate deductions; but would reduce this # by amount of 401(k) EE if I had made that contribution through my LLC in 2018

    – 2, tax withheld: 9,200, per 100% Safe Harbor calculation for 2017

    – 3, SS wages: 86,899; defined so I hit the SS tax cap for 2018 across all my W-2s

    – 5, Medicare wages: 216,844

    There are a bunch of other code boxes and stuff on W-2 but my understanding is they are optional for me this year.

    FORM 2. 1120S; filing due date 3/15

    – Lines 1a, 1c, gross receipts: 226,791

    – 7, compensation of officers: 220,000; ie, my gross salary including pretax deductions

    – 12, taxes and licenses: 11,380; includes medical licensing fees as well as payroll tax deduction of 8,523

    – 17, pension, profit-sharing, etc: 98,100

    Note that pretax deductions are listed twice, once on Line 7 and again on Line 17! This looked really weird to me, but the math all works out on the 1040. But but my understanding is that this arrangement is what will screw my QBI and thus 199A deduction going forward, vs just filing as sole proprietor and listing this stuff on Schedule C Line 19 instead.

    – 19, other deductions: 5,664; professional organizations, actuary fees, employer-paid relocation costs for new attending job

    – 20, total deductions: 335,144

    – 21, ordinary business income: -108,353

    SCHEDULE K: just copy the -108,353 from 1120S Line 21 to Lines 1, 16d, and 18

    FORM 3. SCHEDULE K-1; deadline to provide myself w/ this form is 3/15 and I think a copy is filed w/ the 1120S too?

    – Line 1: as I am the sole shareholder, just copy the -108,353 from Schedule K

     

    FORM 4. 1040; filing deadline 4/15

    – Line 1, wages etc: 284,050; sum of the 5 Lines 1 in our W-2s including my S-corp W-2 above

    – 2b, taxable interest: 291

    – 6, total income: 175,988; ie, subtract K-1 income via Schedule 1

    – 7, AGI: 169,382; less HSA and health insurance premium deductions via Schedule 1

    – 8, standard deduction: 24,000

    – 9, QBI deduction: 0 as my K-1 income is negative

    – 10, taxable income: 145,382

    – 11, 13, and 15, tax: 23,863

    – 16, tax withheld: 14,617

    – 22, amount I owe: 9,246

    1040 SCHEDULE E

    – Line 28A, column i: just transfer the 108,353 from Schedule K-1

    – 31: 108,353

    – 32 and 41: -108,353

    1040 SCHEDULE 1

    – Lines 17 and 22: just transfer the -108,353 from Schedule E

    – 25: 3,450 HSA deduction through my LLC for my wife; my HSA deduction was taken through my residency W-2

    – 29: 3,156 in health insurance premiums since losing my residency (W-2) insurance and obtaining LBMC insurance through my LLC

    – 36, total adjustments: 6,606

    FORM 8889, HSAs; only using since I happened to make my wife’s HSA deduction in 2018 from an individual (not business) bank account; my understanding is we could alternatively have taken this as a business deduction on 1120S Line 19

    – Line 1: check “Family”

    – Line 2: 3,450

    – Lines 3, 5, 6, 8: 6,900

    – Lines 9 and 11–13: 3,450

    Hope all this is useful to someone!

    #191684 Reply
    Liked by docnews
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4074
    Joined: 05/13/2011

    I have a post planned on the 1120-S, but I wanted to do it again first! This is only my second time doing it.

    I did find it easier than the 1040 though!

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #191702 Reply
    Liked by hdo
    Avatar docnews 
    Participant
    Status: Physician
    Posts: 368
    Joined: 01/09/2016

    Somewhat glad I didn’t have to setup an S Corp with its costs and complications. My state made an s corp a bad decision since it is taxed like a c corp at the state level.

    Most important part:
    “But will file as sole proprietor starting in 2019 as it should save me ~6K on my taxes vs filing as S-corp again due to the way QBI is defined.”

    Many s corps under half million profit will dissolve to reap the full benefits of the pass thru deduction this year.

    #191722 Reply
    Liked by hdo
    hdo hdo 
    Participant
    Status: Physician, Small Business Owner
    Posts: 11
    Joined: 01/14/2019

    Agree, 1120S is pretty easy for ER docs once you understand the few annoying little tricks. Lots more repetition for us than our 1040s since our businesses aren’t that complicated taxwise. (I guess if my LLC owned property/anything it would get a little more complicated.)

    Thing I disliked most about the S-corp was the requirement to snail-mail the quarterly 941s. Was just more bureaucratic paperwork since I had already paid instantaneously online by eftps anyway. Going back to sole proprietor will be refreshing.

    #191730 Reply
    Liked by docnews
    hdo hdo 
    Participant
    Status: Physician, Small Business Owner
    Posts: 11
    Joined: 01/14/2019

    Update: Needed to call IRS yesterday for an update on my conversion back to sole proprietor. They told me (1) the government shutdown ate the form I had mailed them 2 months ago and but (2) my unemployment taxes were due for 2018. Thought I had read somewhere that single employee-owner S-corps are exempt from these, but I guess not.

    So I did my unemployment taxes tonight. Briefly, there are two parts to unemployment tax, FUTA (IRS, effectively due Jan 31 for us single employee-owners) and SUTA (state level, w/ varying rules by state). You report FUTA by filing Form 940. You need to pay SUTA before you can even determine your FUTA, as (1) paying SUTA gives you some credits toward FUTA and (2) you pay slightly more FUTA if (like me) you pay SUTA late. TX charges SUTA on all TX LLCs, no matter how you are taxed at the federal level, but the feds only charge FUTA on LLCs taxed as S-corps, not as sole proprietorships.

    My 2018 SUTA ended up at $283 (including $40 late penalty since it is due quarterly in TX and I had maxed it out in 2018 q1) and FUTA at $56 plus undetermined late fees of a few bucks that I’m sure the IRS will bill me for.

    The thing that took me longest on Form 940 was figuring out what the hell an “experience rate” is so I could get Line 10. Finally figured out that (at least in TX) it’s just the base SUTA tax rate of 2.7% modified per-LLC by some bureaucrat for good behavior or something once I have paid SUTA for at least 3 years. So basically, experience rate is the same as SUTA tax rate unless you’ve been told otherwise by the government.

    Biggest surprise to me in this little twist is that my CPA failed to ever mention that I needed to pay unemployment tax! Given the negligible late penalties so far, makes me feel even better about doing all this myself instead of hiring him.

    #198584 Reply
    Avatar Fireneer 
    Participant
    Status: Other Professional, Small Business Owner
    Posts: 3
    Joined: 03/19/2019

    Hi hdo, I have a question.

    This is my first year filing 1120-S.

    Does your S-Corp use cash basis accounting?

    When did you make the Employer profit sharing contribution Line 17 pension, profit-sharing, etc: 98,100 ? did you make it 2019?

    My accountant is saying that the 2018 Employer profit sharing contribution I did in 2019 (March 10th to be precise) cannot go on the 2018 1120-S but it would go on the 2019 1120-S because of my accounting method.

    Does anyone know if my accountant is right or wrong?

    Thanks

    #199557 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6911
    Joined: 01/09/2016

    hdo – did you personally loan your corp the money to pay your expenses? Having a NOL in your situation is a little strange. Are you including the balance sheet and the M schedules? That is what tends to trip ppl up.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #199597 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6911
    Joined: 01/09/2016

    Hi hdo, I have a question.

    This is my first year filing 1120-S.

    Does your S-Corp use cash basis accounting?

    When did you make the Employer profit sharing contribution Line 17 pension, profit-sharing, etc: 98,100 ? did you make it 2019?

    My accountant is saying that the 2018 Employer profit sharing contribution I did in 2019 (March 10th to be precise) cannot go on the 2018 1120-S but it would go on the 2019 1120-S because of my accounting method.

    Does anyone know if my accountant is right or wrong?

    Thanks

    Click to expand…

    Your accountant is wrong.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #199598 Reply
    Liked by spiritrider
    hdo hdo 
    Participant
    Status: Physician, Small Business Owner
    Posts: 11
    Joined: 01/14/2019

    Fireneer, I use cash basis accounting. I made the profit sharing and all other contributions in 2018. I defer to jfox about your accounting question as I am not an accountant. My experience on this whole project has been that I ask 3 CPAs a question and get 3 different answers. It has not inspired confidence.

    #199600 Reply
    hdo hdo 
    Participant
    Status: Physician, Small Business Owner
    Posts: 11
    Joined: 01/14/2019

    Johanna, thanks for the reply. I don’t know how to answer your question about a loan. My bank account balances were in the black the entire year. The S-corp had a loss on paper (is that what you mean by “NOL”?) only because my understanding is that we effectively count ER 401(k) and CBP contributions twice on 1120S (once on Line 7 and again on Line 17). This is why my distribution was negative and (in my understanding) S-corp is a raw deal vs sole proprietorship for people like me since we lose so much QBI deduction (in general… in 2018 my QBI would’ve been negligible anyway even if I just counted the Line 17 money one time).

    Like I mentioned, I don’t understand why the government wants me to do it this way… unless I just did it wrong.

    My understanding of the major tax ramification of a negative S-corp balance is if it’s negative in >=3 of 5 consecutive years, then the IRS considers my business a hobby rather than a real business and I need to change the way I do things. But this year was special since I wanted to max out all the retirement accounts but only made attending money for ~half the year, so it was a stretch. I fully expect to have positive income in the next 4 years. But since I hope to switch to sole proprietor this year, my understanding is it’s kind of a moot point?

    I didn’t do a balance sheet or M schedules because my understanding of the 1120S instructions is my S-corp didn’t make enough money in 2018 to need to do so. If the IRS tells me I need to keep my S-corp in 2019, guess I should go read some basic accounting, since as I mentioned the two CPAs I went over these forms with basically just said “looks good” and refused to take the hourly fee I wanted to pay them.

    #199604 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6911
    Joined: 01/09/2016

    NOL is Net Operating Loss. Unless you have “basis” in your s-corp, the loss is not deductible for personal tax purposes. That is why I asked. The 3 of 5 hobby loss rule is absolutely irrelevant to your situation. No, you are not supposed to count retirement plan contributions twice. Relocation fees are no longer deductible.

    With all due respect, I am rather concerned by your lack of understanding of the complexities of s-corporation tax law. Without a Balance Sheet, the IRS has no way of knowing whether or not you have the basis to be able to deduct your NOL and you could very well receive an inquiry. If your bank account balances were in the “black” all year, ending up with a NOL of ($108,353) without your having to contribute personal money to the business is just illogical. Surely, even a non-CPA can see that. Should you not have basis to deduct your loss, that means that this loss turns into a capital loss (limited to a deduction of $3k/yr) when you dissolve the corp to be a sole proprietor. I strongly suggest you get this all figured out before you change your business structure.

    Your example is not helpful and could very possibly lead others to make mistakes as DIY S-corp filers. I don’t mind you screwing up your decision to DIY an S-corp return, but I DO mind you misleading others.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #199615 Reply
    hdo hdo 
    Participant
    Status: Physician, Small Business Owner
    Posts: 11
    Joined: 01/14/2019

    Thanks for the insight. How would you have counted my retirement plan contributions on 1120S to make them come off my 1040 income correctly?

    Completely agree about my lack of understanding. Although I have read your excellent writing on WCI and elsewhere and I trust and respect you, the most concerning thing to me about this whole project is that other CPAs have said the exact opposite as you re counting the retirement plan contributions, so I am no longer sure what to think. Maybe I should’ve hired one of them to go the full enchilada and fill out the tax forms de novo for 2018 and not just double-check my work, but seems a bit late now. I put a big disclaimer on the original post per your last paragraph.

    #199619 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6911
    Joined: 01/09/2016

    Thanks for the insight. How would you have counted my retirement plan contributions on 1120S to make them come off my 1040 income correctly?

    Completely agree about my lack of understanding. Although I have read your excellent writing on WCI and elsewhere and I trust and respect you, the most concerning thing to me about this whole project is that other CPAs have said the exact opposite as you re counting the retirement plan contributions, so I am no longer sure what to think. Maybe I should’ve hired one of them to go the full enchilada and fill out the tax forms de novo for 2018 and not just double-check my work, but seems a bit late now. I put a big disclaimer on the original post per your last paragraph.

    Click to expand…

    Thank you and I appreciate you doing that. Your $18,500 employee contribution is accounted for in your W2. Your employer contribution goes on line 17 and reduces your net income.

    You opened by saying, “I did have all my paper tax forms checked by a CPA” then stated above that “…I ask 3 CPAs a question and get 3 different answers” and now you are saying that 2 CPAs agreed (on what, I don’t know). I have to wonder about all of these CPAs you are visiting who glanced at a self-prepared Form 1120S and gave you the thumbs up (understanding, of course, that they were not going to be signing the returns as preparer). Sounds a little unusual to me but they have seen the returns and I haven’t seen anything but the numbers you posted. I’ll stand by my comments and let them stand by theirs.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #199624 Reply
    Liked by Tim
    hdo hdo 
    Participant
    Status: Physician, Small Business Owner
    Posts: 11
    Joined: 01/14/2019

    Sorry, my “3 different answers” comment was specifically regarding whether there’s a difference in QBI when filing as S-corp vs sole proprietorship. Should’ve been clearer and not made a general inference based on that 1 thing.

    The 2 CPAs agreed on my numbers. The first (teleconferenced before I filled out the 1120S) looked at the spreadsheet where these numbers came from and had no suggestions other than to get a separate business bank account, which I did. After that I read more stuff on the Internet and actually did the 1120S and got nervous, so I sat down with another CPA and showed him the actual 1120S, 1040, et al with the same numbers I posted, and he again had no qualms except some very cosmetic stuff. Agree it was a bit of a red flag that they did not take my money or even recommend that they go up a level and prepare my forms themselves and sign them.

    #199628 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 1419
    Joined: 09/18/2018

    I am a little curious here. CPA’s like physicians get asked things all the time. Is my assumption correct that you have an engagement letter executed for the review of your tax forms? I mean, it’s a business dealing and I am sure you had to create an agreement. Exactly what services did the CPA provide? Your CPA will have a work product file just in case he needs to defend his/her firm from a liability or license complaint.

    By the way, a review will cost you as much as a preparation. About the only difference is a signature. How much did you pay for the review?
    Sometimes I just think a few details are misconstrued or misunderstood.
    Sorry for butting in. Carryon with your story.

    #199639 Reply

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