Chapter 9 excerpt · Entity selection

The S election is a tax decision, not a logo.

From THE TAX CUTTERY® Guide to Federal Income Taxation, Professional Edition, Chapter 9 (pp. 131–150). Paul D. Diaz, EA, MBA.

9.4 The S corporation election

An S election is not a new company. It is a tax election that lets an owner-operator take a wage/distribution split: reasonable wages subject to payroll tax, remaining profit distributed without employment tax. That split is the whole point. If the wage is theater, the IRS can recharacterize the rest.

9.5 Reasonable compensation

Shareholder-employees must take wages appropriate for the work. There is no published safe-harbor dollar. Courts look at duties, time, and comparable pay. A $1 salary and a large distribution is not planning. It is bait.

QBI and built-in gains

§199A (up to 20% of qualified business income, made permanent by OBBBA) can shrink or vanish if W-2 wages and SSTB limits are wrong. §1374 can tax pre-conversion appreciation if you came from C corporation status and sell inside the recognition period.

Diaz, Paul D. THE TAX CUTTERY® Guide to Federal Income Taxation, Professional Edition, Ch. 9. Full chapter, citations, and examples are in the book — not on this page.