Dr. Sanders is a veterinarian who is the sole proprietor of Vet, Inc., an S corp

Question

Dr. Sanders is a veterinarian who is the sole proprietor of Vet, Inc., an S corporation. The corporation offers Dr. Sander's consulting and surgical services to other veterinarians. Dr. Sanders does not receive regular payments from the corporation, but withdraws funds as the need arises. During the current, he withdraws $118,000, and the net income of the corporation is $225,000. The corporation does not deduct the $118,000, nor does Dr. Sanders include it in his gross income. He does, however, report the $225,000 in his gross income. Because Dr. Sander's has recognized all of the corporation's income, he sees no need to pay himself a salary. He justifies the treatment by arguing that he is not an employee. (he is the owner.) of the corporation and that the federal income tax consequences are the same. Evaluate the approach taken by Dr. Sanders and Vet, Inc using. Include specify tax laws

Explanation / Answer

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

In view of the above, the approach taken by Dr. Sanders and Vet, Inc is correct, and the tax will be payable by him in his personal tax return.

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