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Question 97: Able and Baker own 50% of three corporations. The first is a C corporation which has as its sole source of income the payment of management fees from the other two corporations (which are both S corporations). The two shareholders receive directors fees from the C corporation and they are officers of that corporation. Can they establish "SIMPLE" plans individually using this self-employment income without covering any other employees? |
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Answer: Let's start with the notion that the three corporations are obviously a controlled group (and likely are a management function affiliated service group as well). Nonetheless, their separate unincorporated businesses as directors of the C Corp is technically not part of the controlled group.
The two shareholders have several functions in the corporation, if I am correctly reading between the lines of your question. They are directors, officers, and managers of the S Corporations. In other words, they most all of the work of the C Corporation, some of it clearly in the capacity of an employee. It is only their work as a director that would qualify as a separate business. They could not set up a SIMPLE plan with regard to their compensation as corporate officers or for doing the work of the corporation. If I were an auditor, I would look very carefully at the total payments to the shareholders and compare how much is allocated to each service. Particularly with regard to the directors fees, if I found that they exceeded a reasonable fee for what they actually did as directors (and face it -- in a two man corporation, the directors as such don't do much) I would either reallocate it as compensation for employee services, or (if I were really feeling frisky) treat it as a nondeductible dividend. Either way, it could blow your SIMPLE contribution out of the water. Bottom line: it ain't that easy to get around covering your employees. |
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