Don’t skimp on S corporation salaries

S corporation owners often take modest salaries as a tax-saving strategy. By distributing most of the corporation’s profits in the form of dividends rather than wages, the company and its owners can avoid payroll taxes on these amounts. The tax savings may be even greater now that the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately) has gone into effect. (S corporation dividends paid to shareholder-employees generally won’t be subject to the new 3.8% Medicare tax on net investment income.)

Although S corporations may be tempted to pay little or no salary to their shareholder-employees, this is a dangerous tactic. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low.
 
To avoid an unexpected tax bill, S corporations should conduct an analysis — using compensation surveys, company financial data and other evidence — to establish and document reasonable salaries for each position. Please contact us if you have questions about the right mix of salary vs. distributions for your S corporation’s shareholder-employees.

Renting out your vacation home brings tax complications

If you rent out your vacation home for 15 days or more, you must report the income. But exactly what expenses you can deduct depends on whether the home is classified as a rental property for tax purposes, based on the amount of personal vs. rental use. Adjusting your personal use — or the number of days you rent it out — might allow the home to be classified in a more beneficial way.

With a rental property, you can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.

With a nonrental property, you can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.

We can help you determine how your vacation home rental will affect your tax bill — and whether there are steps you can take to reduce the impact.