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162 bonus on a K1 for s-corp or LLC


Guest scadv

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Guest scadv

I currently have an accountant and a tax attorney at odds on taking a 162 bonus on K1 income.

The accountant says you cant do it, the tax attorney says you can...

The attorney claims that the bonus is basically deducted from the taxable K1 income. (I have doubts that its that simple to figure)

Does anyone have experience taking a 162 bonus with K1 income?

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I currently have an accountant and a tax attorney at odds on taking a 162 bonus on K1 income.

The accountant says you cant do it, the tax attorney says you can...

The attorney claims that the bonus is basically deducted from the taxable K1 income. (I have doubts that its that simple to figure)

Does anyone have experience taking a 162 bonus with K1 income?

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I would ask them each to detail Why and Why not. Then you can decide on the merits of each rationale.

I must point out that your post is not too clear as to what you really mean and some clarification might be in order

I have not been dealing with S Corps for many years, but with a C Corp it is quite common for the company to give bonuses (or cover expenses) then pick up the tax tab as a 162 double bonus. I cannot think oof a reason why an S Corp cannot pick up expenses.

If you do a Google search on ' section 162 gross up bonus' you should find many articles discussing gross up for executives of large companies along with a few for rank and file at companies such as Google.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest scadv

I am a Financial Advisor currently helping the business to "informally" fund a SERP agreement for two key employees of a company.

The three shareholders want some type of NQDC plan for themselves.

Its three equal shareholders of a holding company (LLC) which owns two operating companies; a LLC & an S-Corp.

Two of the shareholders are employees of the S-corp, and the other is an employee of the LLC subsidiary.

A Tax Attorney who works in the advanced planning department of an Insurance Company I do business with (and consulted on the case with) suggested the shareholders take a 162 exec bonus on their K1; and that the bonus would be "taken out" of the taxable income on the K1.... I had never heard of this being done before, but the more I think about it the more it seems it could possibly be done.

(I always take the "advanced planners" at insurance companies with a grain of salt... lol)

The clients accountant claims that the 162(a) bonus can only be done at the operating company level.... I am very skeptical of this as well.

So how would the accounting work out if a 162bonus was paid with K1 income? Is the tax liability reduced by doing this? If so, what would the general formula for the reduction be?

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Section 162 relates to ordinary, necessary and reasonable business expenses and therefore can only be taken at the company operating level. It is done before K1 is calculated. Where on K1 would such a deduction be taken anyhow?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest scadv
Where on K1 would such a deduction be taken anyhow?

Thats what I am trying to figure out.

I have found mention of it being taken with K1 income, but none of the sources actually show how it breaks down.

I have asked the tax attorney who mentioned it but he is out of town currently so I am waiting on him to get back to give me an explanation.

This is just a guess, but maybe sec3 line 13? I dont know, this is currently out of my professional expertise.... hence the reason I posted this question.

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I think you should go look at a K-1, I do not recall there being sections but there are Parts, so you probably mean Part III. Anyhow there is no place to do what you are proposing to do. Also since the bonus would be an expense of the corporation, the deduction can only be taken by the corporation. It cannot be taken by the Partner because the Partner has no expense. Even if the Partner has an expense, that has to be taken on their personal 1040.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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