I have a small fitness business that is incorporated as an S Corp. Using round numbers for simplicity, I paid $100,000 for the business, of which $50,000 was considered equipment cost (All of the exercise equipment, treadmills, etc). I am depreciating the equipment cost over 5 years, which is a $10,000 a year.

If we made $200,000 in revenue, and had $50,000 in profit after salaries and expenses were paid, so there is $50,000 in the bank. Since we depreciated the equipment, for tax purposes we show a profit of $40,000.

Am I entitled to take the $50,000 as a distribution, but pay tax on $40,000 because of the distribution?

How does that work?

Thank You

Hi, mccrossss!

Since your question is mostly about taxes, I've moved it to this forum topic area so that it will be more likely to get noticed and answered by our tax experts.

Thanks!

At face value, you can take the $40,000 as a distribution via the Schedule K-1 and pay just the income taxes due to the IRS and to your state.

However, the IRS will NOT be satisfied with that, as there is the matter of the FICA (Social Security and Medicare) taxes.

If you take an active part in running the business, you can:

- be employed by the S corporation and draw a paycheck equal to what is considered the norm for persons working in the fitness business for your locale.

OR

- pay self-employment taxes on your $40,000 distribution.

Because 2008 has already passed, the second option is probably the simplest and best solution for 2008.

For 2009, you need to become an employee of your S corporation and start drawing a salary, with the necessary withholding of FICA taxes, plus state and federal income taxes, plus unemployment taxes. A local tax pro will help you set this up for a fee, or you can use one of the many payroll companies.

Failure to pay either the FICA taxes or the self-employment tax will eventually be noticed by the IRS, and then the resulting audit could get REAL ugly.