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Need Some Deductions for 2011?

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10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Business Structures

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Taking Money Out of an S-Corporation

S-Corporation owners can take money out of the corporation in a variety of ways.

1) Wages:

S-Corporation shareholders who work for the company are employees. They receive a paycheck like any other employee and have taxes withheld from their gross pay.

Shareholders who work for the S-corporation should receive reasonable compensation for the type of work being performed.

2) Distributions from S-corporation earnings:

Distributions from earnings are not subject income tax withholding. A distribution may be made by simply cutting a check for a specific amount, made payable to each shareholder.

Since an S-corporation shareholder who works for the S-corporation is classified as an employee rather than self-employed, distributions are not subject to self-employment tax.

Caution! Don't take all your money out of the S-corporation as a distribution just to avoid self-employment tax. The IRS and Social Security Administration are well aware of this ploy.

You can minimize self-employment tax by taking a salary in the lowest reasonable amount.

Then, any additional compensation, over and above your salary, may be taken out as a distribution of S-corporation income. The distribution is reported on Schedule K-1 (S-corporation).

3) Loans:

S-corporation shareholders may borrow from the business.

A note should be prepared and properly executed. The note should include normal lending terms. For example,  a fair market interest rate, unconditional promise to repay, and a date certain for repayment.

4) Reimbursement of expenses:

If you spend your own money on business-related items, the S-corporation my reimburse you. It's a good idea to maintain a petty cash fund for such expenses.

For every dollar disbursed from the petty cash fund there should be a receipt to support the disbursement.

So, don't forget to get receipts if you intend to be reimbursed by the business for your out-of-pocket business-related expenditures.

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S-corporations: Legal and Tax Aspects of S-corporations and C-corporations

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