Discussion:Special situation - child tax credit

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Discussion Forum Index --> Tax Questions --> Special situation - child tax credit

Skq9545 (talk|edits) said:

11 January 2007
Client owns a company which is incorporated. Therefore, he has no self-employment tax. He did not pay himself or his wife much of a salary and on income basis could qualify for the child tax credit. Do I dare risk it and take the credit?

Nutbunch2002 (talk|edits) said:

11 January 2007
Short answer yes.

Long answer you have to worry about personal expenses being run through the C-Corporation. How do they live on the small salary they draw? Do they have few expenses (no mortgage interest would be a clue). Any personal expenses run through the C-Corp would be considered additional salary to them, if you're lucky. Or the agent will go the Dividend route.

If they have few expenses, can live on their meager salary, and have kids then yes they can take the child care credit.

Skq9545 (talk|edits) said:

11 January 2007
You are correct, they have run several personal expenses through the Corporation, which I pulled out of the tax return. Through advice from another CPA, he suggested making a note payable to the corporation for all of the years that they have paid those expenses and setting up a reimbursement plan out of annual salary to repay the note. Actually, when I wrote up the question, I meant to ask about EIC and not Child Tax Credit.

Taxref (talk|edits) said:

11 January 2007
Since this has become an EIC question, you have to keep in mind that net investment income cannot exceed $2,800. Dividends from a C corp or net profit from an S corp is investment income.

Blrgcpa (talk|edits) said:

11 January 2007
If the stockholder owes the corp money, he should pay interest to it to keep everything on the up and up.

Skq9545 (talk|edits) said:

17 January 2007
After reading the information on EIC, I don't know if I want to risk taking it. It claims if the credit was taken due to fraud, the credit could be lost for 10 years. If I know they took money out of the corporation in the form of a loan, would it be considered fraudulent to say their income is below $6,000.

Sandysea (talk|edits) said:

17 January 2007
Due diligence SKG....you know that they lived on corporate funds even though they skirted wages....I myself would not risk it :)

Dennis (talk|edits) said:

18 January 2007
The distributable K-1 income from an S Corp is not investment income, Sandy.

Taxguy1024 (talk|edits) said:

19 January 2007
It's included as investment income only if its passive, right..??

Kathyt (talk|edits) said:

19 January 2007
I would not take it either, I agree with Sandy, due diligence. It's only Jan 19th, can you bump up the salary by putting some of the personal expenses paid by the corp onto the W-2? Have the W-2's been filed with SSA yet? I think I'd try to get the client to bump up the salary to the amount that he actually took out for the year to pay his personal expenses (is this a C or an S?)

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