Hacker News Reader

Comment by tptacek | Hacker News Reader

If you were playing the S-Corp distro game, my understanding is that you were already living in a world of uncertainty, because (a) paying out distros that are large relative to your wages is an audit flag, and (b) the IRS already has the authority to retroactively decide what fair market value for your company role is and then whack you for the money you tried to stash in distros.

People do it anyways because everyone is unlikely to get audited almost no matter what they do. That doesn't mean that closing the loophole is going to throw people's tax planning in to chaos. You opt for chaos when you decide to cheat.

View on HN

Playing the "S-Corp distro game" is not cheating.

If an S-corp brings in, say, several hundred thousand dollars in net profit and the principal pays themselves a fair wage for an employee in that role (perhaps it's in the neighborhood of $80k - $150k), then that is completely legitimate under current law.

Aggressive but correct tax planning is not cheating, and for a responsible business owner who wants to maximize personal income (and ability to reinvest in the business), it's the way the game should be played.

I agree, but what's your point? If you're getting ~90k in wages, the rest of your income isn't subject to FICA anyways.

(That may soon change, with talks of lifting the caps on payroll taxes, and that's a change I'll be far more ambivalent about).

I admit, that point had not occurred to me. Nevertheless, the Medicare portion isn't subject to a cap.

My main issue was this: "You opt for chaos when you decide to cheat." Aggressive tax planning within the bounds of the law is not cheating, and I think it's unfair to characterize it that way.

The wage/distro setup is an advantage unique to S-Corp owners, and I understand why some want to see it eliminated. But to use it today is not cheating.

The courts appear to disagree with you. "Aggressively" characterizing a portion of your income as a distribution when it is really just disguised wages appears to be a losing proposition, except for the fact that you're probably not going to get audited (as long as you pay yourself a relatively significant amount as bona fide wages).

A tax planning strategy that relies on never getting audited, and that fails spectacularly when you do get audited, I think can reasonably called "cheating". I get that reasonable people can disagree on this, and I'm fine with reasonably disagreeing with you.

By "aggressively within the bounds of the law", I was suggesting that the IRS's position and court's position was already taken into consideration (not just the low chance of being audited).

Regardless, surely it's possible to have situations where distributions are legitimately greater than zero. If I'm an absentee owner who pays a manager to operate my business, my distributions shouldn't be treated as wages.

I see it as a continuum -- on one end, you have cheaters who are paying themselves $10k annually and taking the rest as distributions. On the other end, you have absentee owners who should legitimately be able to claim distributions. In the middle there are many shades of gray.

Here we converge on agreement. Thanks for your patience.

Reply on news.ycombinator.com