Abezon, pls help. thanks

What is the name of your state? Maryland
Here is my query...
Taxpayer1 and Taxpayer2 are equal owners in a small SCorp (small meaning less that $5mm revenue) They have been recving compensation and distributions from the corp. They now want to open another SCorp2 that will be a service company to Scorp1. They want to be paid by Scorp2 and stop the compensation from Scorp1. Not to be confusing but in the eyes of the IRS what does this mean since they will not rec compensation nor distributions from SCorp1 though it will show profit. Can they do this legally and if so how does it work with the IRS. Will this raise a flag in that no compensation is given to officers of the Corp, etc. Hope I am not too confusing.

Thanks for your help

[abezon]

Well, since you begged . . .

First, I'm wondering why you feel the need to create a subsidiary S-corp. It's going to require 2 corporate tax returns, which is a pain in the a**. I think you're probaly just creating a bookkeeping headache.

As for the IRS, the big red flag for S-corps is owners taking too much of the profits as distributions/dividends & not paying themselves reasonable wages. (Owners usually do this to try to avoid paying FICA taxes on their profits.) If S-corp 1 shows profits but doesn't pay you any wages, the IRS will question this. You will have to direct them to your other S-corp & argue that you're taking all earnings out of it. At which point, the IRS will wonder why you created a second S-corp at all. Then they might force you to take earnings from the first S-corp anyway, since you're insisting it's a second taxable entity. Then they will assess penalties for not paying yourselves from SC1. All told, they will take a long hard look at both your corps. This is bad. The best S-corp return is the one that NEVER has a human IRS worker look at it. Get the picture?

It doesn't matter if you take out the profits or not. The full profit is passed through to your individual tax returns. Undistributed profits just accumulate in the Schedule M-2 & reduce what you have to pay taxes on in later years when you do take out money.

Abezon.

Thanks for the comments and quite frankly that is the same
thoughts I had. Quess I just want some reinforcement. I
promise to be more patient with my next inquiry.

Thanks again. My faith is restored in your website.