• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Can An Individual Claim Unpaid Salary as NOL Carryforwards?

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

JohnPerry

Junior Member
What is the name of your state (only U.S. law)? NC

I am part of an LLC that files as a Partnership and we have been running negative for the past 5 years. As such none of the partners (3 of us) has taken any salary or pay from the company and have been living off of personal savings (I've had no source of income). This year we will have a nice surplus to finally pay us with, but my question is, since I made no income the past 5 years can I claim I was owed a reasonable salary each year and use that as a carryforward to break up some of my income over those years for tax purposes?

So for example, if I made $300,000 this year, rather than being taxed this year at a high tax rate, spread this year's income over the past 5 years to say I was owed a reasonable salary that the company was unable to pay, for ex $50,000/yr, and therefore each year is taxed in a lower tax bracket? This makes sense to me because if I was working a normal job I would've had that salary each year and paid in that lower tax bracket each year, but now that I have a larger lump sum my taxes seem to be much higher.

Thanks!
 


davew128

Senior Member
Partners in a partnership (or an LLC treated as one) are not allowed to take a salary. Nothing else is relevant, nor has any basis in reality let alone tax law.
 

LdiJ

Senior Member
What is the name of your state (only U.S. law)? NC

I am part of an LLC that files as a Partnership and we have been running negative for the past 5 years. As such none of the partners (3 of us) has taken any salary or pay from the company and have been living off of personal savings (I've had no source of income). This year we will have a nice surplus to finally pay us with, but my question is, since I made no income the past 5 years can I claim I was owed a reasonable salary each year and use that as a carryforward to break up some of my income over those years for tax purposes?

So for example, if I made $300,000 this year, rather than being taxed this year at a high tax rate, spread this year's income over the past 5 years to say I was owed a reasonable salary that the company was unable to pay, for ex $50,000/yr, and therefore each year is taxed in a lower tax bracket? This makes sense to me because if I was working a normal job I would've had that salary each year and paid in that lower tax bracket each year, but now that I have a larger lump sum my taxes seem to be much higher.

Thanks!
No...you cannot do that. However, if your partnership had losses in the previous years, those losses would have passed through to your personal return via your K-1...and if you had no income from any other sources, then you would have an NOL to offset some of this year's income. What is the story there?
 

JohnPerry

Junior Member
No...you cannot do that. However, if your partnership had losses in the previous years, those losses would have passed through to your personal return via your K-1...and if you had no income from any other sources, then you would have an NOL to offset some of this year's income. What is the story there?
Thanks for the replies! ..unfortunately not what I was hoping to hear :( The problem is I've been living pretty lean, so while I haven't made money I haven't spent too much either (probably spent $10,000-15,000/yr - which I'm guessing I can't claim as NOL anyway since that is my personal expenses). It just seems a bit unfair that rather than get fair compensation of $50,000/yr over these years, getting it all at once is taxed much higher with no regard for what was made (or salary foregone to start the company) in the past years.

Another question as I've been researching this - would it be advisable to switch to an S-Corp so that we can set a salary and pay the rest as dividends? I'm guessing it's too late to do that this year but could that save me on taxes in future years?

Thanks!!
 

LdiJ

Senior Member
Thanks for the replies! ..unfortunately not what I was hoping to hear :( The problem is I've been living pretty lean, so while I haven't made money I haven't spent too much either (probably spent $10,000-15,000/yr - which I'm guessing I can't claim as NOL anyway since that is my personal expenses). It just seems a bit unfair that rather than get fair compensation of $50,000/yr over these years, getting it all at once is taxed much higher with no regard for what was made (or salary foregone to start the company) in the past years.

Another question as I've been researching this - would it be advisable to switch to an S-Corp so that we can set a salary and pay the rest as dividends? I'm guessing it's too late to do that this year but could that save me on taxes in future years?

Thanks!!
It is possible to save some social security and medicare tax by switching to an S-corp. However, you must pay yourself a reasonable and normal (for the industry) salary for the work you perform...and it must be done as salary with proper withholding and a W2 issued at the end of the year.
 

davew128

Senior Member
Thanks for the replies! ..unfortunately not what I was hoping to hear :( The problem is I've been living pretty lean, so while I haven't made money I haven't spent too much either (probably spent $10,000-15,000/yr - which I'm guessing I can't claim as NOL anyway since that is my personal expenses). It just seems a bit unfair that rather than get fair compensation of $50,000/yr over these years, getting it all at once is taxed much higher with no regard for what was made (or salary foregone to start the company) in the past years
Did you not read a word of what I posted? Those considered partners in a partnership CANNOT draw wages from the partnership. You didn't forego anything because you had nothing to forego. This is fundamental partnership tax law. Now you could have drawn a guaranteed payment, but the reality is that if all partners did so, the bottom line tax number would NOT have changed.
 

JohnPerry

Junior Member
Thanks so much for your help! I think what I will do is convert to an S-Corp for next year to save on the self-employment taxes. From what I've read it seems easy enough to me, the major change that I've seen is that I need to set a fair market salary for my position that is paid with proper withholding, are there any other additional taxes or anything that I'm missing or should be aware of with converting a Partnership to an S-Corp?
 

LdiJ

Senior Member
Thanks so much for your help! I think what I will do is convert to an S-Corp for next year to save on the self-employment taxes. From what I've read it seems easy enough to me, the major change that I've seen is that I need to set a fair market salary for my position that is paid with proper withholding, are there any other additional taxes or anything that I'm missing or should be aware of with converting a Partnership to an S-Corp?
State and federal unemployment insurance is one. You may be required to have worker's comp insurance but that would benefit you.
 

davew128

Senior Member
You should REALLY consult with a knowledgeable tax professional before blindly converting to an S-Corp. If you've been running losses as a partnership, converting to any type of corporation might have IMMEDIATE negative consequences depending on how the partnership losses were funded.
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top