Corporate distributions to owners are not deductible

Corporate distributions to owners are not deductible by the corporation, but are taxable to the
stockholders who receive them. However, the distributions are only taxable if the corporation has

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earnings and profits that exceed the amount of the dividends paid in cash or the value of property
distributed to shareholders.
The tax rate for ordinary dividends for the tax year in which you file in, will range from 10
percent to 37 percent. Take for instance, if you are single tax payer, the tax bracket that you will
fall in is 21 percent (26 U.S. Code § 1.Tax imposed). This is the percentage that will be paid on
any dividends received from the corporation. However, qualified dividends have a lower tax
bracket rate because they are taxed at the capital gain rate. If your income is $38,600 or less, you
are exempted from paying taxes on qualified dividends (Publication 542 (01/2019),
Corporations).
Conclusion: To maximize the tax savings from an S corporation, you need to minimize
the salary paid to shareholder employees. Set the salary too low and you run the risk of an IRS
examination and penalties. On the other hand, if you set the salary to high, you will owe more
than you should (Nelson, 2018). The tax code requires an S corporation to pay “reasonable
compensation” to an owner-employee, in many cases, an S corporation would still not have to
pay all of its profits out as wages subject to employment taxes. However, it is recommended that
you split the $180,000.00 as salary and dividends. The salary in which you pay yourself must be
higher than the dividend. The same goes for Ms. Mandy Jones. Keep in mind that, a salary less
than the dividend distribution is a red flag for the IRS and dividends are perceived as a loophole,
and that puts their FICA tax savings at risk.
Issue 2: Based on the S-corporation business entity recommended, what percentage of ownership
should the client’s daughter, Mandy Jones, have?
Analysis: There are two options available that the client, Bob Jones, can consider in
deciding to share ownership, Mandy Jones. The first option is to allow Mandy Jones to become a

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shareholder and an employee or for tax saving purposes, the second option the client can
consider is income shifting amongst family members.
As a shareholder of the company, Mandy Jones, will have part ownership of the business
as long as Ms. Jones owns shares belonging to the company (Horton, 2019). As partial owner of
the company, common shareholders have the right to participate in a company's profitability for
as long as they own the shares. The division of profits is based on the number of shares owned
by a shareholder, and gains can be substantial to shareholders over time (Horton, 2019).
The second option that Mr. Jones should consider is income shifting. Mr. Jones can make
someone in a lower tax bracket a shareholder in his S-Corp to give them money. For example,
Mr. Jones is taking care of his daughter and needs to give her $30,000 each year to help with
expenses. You would need to earn $33,000 or more just to be able to write a check for $30,000.