One of the free services we offer to anyone considering becoming a client at USTaxAid Services is a review of past tax returns. It’s amazing some of the things I find.

In the case of a couple a few years, though, I found a plan that had actually created over $10,000 in taxes that they shouldn’t have had to pay. No, we’re not talking about missed deductions, we’re talking about going out of your way to create a way to pay more than you’d pay if you hadn’t done anything.

This couple operated their successful business as an S Corporation. And, like good S Corporation owner/employees they took officer salaries. The problem was that they took too much income in salaries.

The salaries were reported as income on their personal tax return. But because the salaries were so high they created a loss in the company. Normally you’d think that the worst that would have happened would be some extra payroll taxes. The salary was income, but the loss in the corporation flows through – right?

In this case, wrong. That’s because you need to have sufficient basis in order to take a loss deduction. Otherwise, the loss is suspended.

The couple had created phantom income in salaries and the losses through the S Corporation weren’t deductible.

Tomorrow we’re going to go through what goes into calculating basis in an S Corporation. This is one of the three items that the IRS will be looking for in the coming S Corporation audit sweep.

Go to USTaxAid Coaching http://www.usataxaid.com/coaching to learn more about S Corporations in March when we featuring Corporation filings.