S-Corp with a Loss and Tax-Advantaged Solo 401k

[triphop1315]

I have an S-Corp in CA which I expect to make little income this year, in large part because I plan to spend little time on it. Historically, the S-corp has had income, and I, the sole owner/employee, received wages. I also have a solo 401k that allows after-tax contributions. My question is: it is permissible/advantageous to continue receiving a wage/paying payroll taxes, in order to make after-tax contributions? Would the IRS have any objection to this arrangement? I'd have to continue to make contributions to the company in order to keep it afloat/have sufficient wages to pay me.

My understanding is that the wages I would receive wouldn't be taxed effectively because the S-corp would be taking a loss on them, allowing me to deduct them. I'd lose the payroll tax money in part, but I think an extra 50K of tax advantaged space would be worth it.

Thoughts?

 

[LdiJ]

I have an S-Corp in CA which I expect to make little income this year, in large part because I plan to spend little time on it. Historically, the S-corp has had income, and I, the sole owner/employee, received wages. I also have a solo 401k that allows after-tax contributions. My question is: it is permissible/advantageous to continue receiving a wage/paying payroll taxes, in order to make after-tax contributions? Would the IRS have any objection to this arrangement? I'd have to continue to make contributions to the company in order to keep it afloat/have sufficient wages to pay me.

My understanding is that the wages I would receive wouldn't be taxed effectively because the S-corp would be taking a loss on them, allowing me to deduct them. I'd lose the payroll tax money in part, but I think an extra 50K of tax advantaged space would be worth it.

Thoughts?

Where would the money come from that you would be depositing into the S-Corp in order to continuing paying you a salary?

 

[davew9128]

Where would the money come from that you would be depositing into the S-Corp in order to continuing paying you a salary?

My guess is an owner's contribution to capital. But the issue then becomes if this is a trade or business versus a not for profit activity.

 

[triphop1315]

Correct, it'd be owner's contribution to capital. Perhaps a small amount earned from external sources. It certainly has historically been a for profit business. My main interest in continuing it, though, would be in continuing to be able to contribute to the 401k with after tax dollars.

 

[Taxing Matters]

My guess is an owner's contribution to capital. But the issue then becomes if this is a trade or business versus a not for profit activity.

I see what you are going for, but the tax law doesn't care whether the corporation makes a profit. Rather, the way I'd phrase it is, using the Code language, whether the S-corporation deduction for the salary and contributions would allowed under IRC § 162 as an "ordinary and necessary" expense of the business. In other words, the salary paid needs to be for actual work done for the corporation that benefits the business. Paying an employee a substantial salary to do nothing in an essentially inactive corporation just so that the said employee can make make 401(k) contributions (and it is 401(k), not 401k, 401K or any of the other ways I've seen it written on the internet) doesn't strike me as a passing the test of being an ordinary and necessary expense for a business. As a result I think an IRS examiner would indeed have a problem with the arrangement.

 

[LdiJ]

Correct, it'd be owner's contribution to capital. Perhaps a small amount earned from external sources. It certainly has historically been a for profit business. My main interest in continuing it, though, would be in continuing to be able to contribute to the 401k with after tax dollars.

That wasn't my question. I understand that it would be an owner's contribution to capital. I was asking where you personally would get the money to contribute to the S-Corp. Although its really a moot point now. I think that TM's response is likely the most accurate one.

 

[triphop1315]

That wasn't my question. I understand that it would be an owner's contribution to capital. I was asking where you personally would get the money to contribute to the S-Corp. Although its really a moot point now. I think that TM's response is likely the most accurate one.

It'd be from previous earnings from the business.

 

[triphop1315]

I see what you are going for, but the tax law doesn't care whether the corporation makes a profit. Rather, the way I'd phrase it is, using the Code language, whether the S-corporation deduction for the salary and contributions would allowed under IRC § 162 as an "ordinary and necessary" expense of the business. In other words, the salary paid needs to be for actual work done for the corporation that benefits the business. Paying an employee a substantial salary to do nothing in an essentially inactive corporation just so that the said employee can make make 401(k) contributions (and it is 401(k), not 401k, 401K or any of the other ways I've seen it written on the internet) doesn't strike me as a passing the test of being an ordinary and necessary expense for a business. As a result I think an IRS examiner would indeed have a problem with the arrangement.

Thank you for the wonderful reply!