The authors are concerned with the tendency to pay extremely low salaries to shareholder-employees. The IRS sternly educated S corporations on the proper levels of compensation, and the distinguished tax law as applied to S corporations vs. partnerships. The courts tended to rule in favor of raising shareholder-employee wages.
When S corporations are found guilty of shirking salary payments, the IRS may subsequently collect recovered FICA and FUTA taxes, interest, failure to file penalties, late deposit penalties, and negligence penalties for failing to try hard enough to adhere to the Tax Code.
The point of contention in these cases hinges upon how the term 'wages' is defined. Taxpayers have give themselves too much latitude in this area. When discussing these cases, the courts felt a duty to examine their financial "substancerather than their legal form." Fellows and Jewell emphasized that deviations from equitable salary payments to S corporation shareholder-employees will no longer be tolerated.
Although the Revenue Reconciliation Act provided an amended approach to tax calculation, Cash and Dickens point out that its repercussions are not all favorable to corporations. This tax amendment required that beginning in 1990, the Alternative Minimum Tax (AMT) would be figured from adjusted current earnings, rather than regular taxable income. Further, taxpayers must figure Adjusted Current Earnings (ACE) each year as a prerequisite to applying the AMT.
Deductions to Adjusted Current Earnings that decrease profits and earnings, such as federal taxes and dividends, are disallowed because they are not subtracted when AMTI is calculated.
An alternative minimum tax depreciation calculation depends on several factors, such as when a particular item was first used. Two methods used are the 150% declining balance technique and the double declining technique.
Cash and Dickens emphasize that depreciation is the most important "special rule" in figuring Adjusted Current Earnings. The Alternative Depreciation System (ADS) is used for all three of "regular tax purposes," Adjusted Current Earnings and Alternative minimum Tax. Choosing the Alternative Depreciation System can be a boon to corporations who are required to pay the Alternative Minimum Tax every year. ADS is also helpful to those companies who do not possess the time or money to make complex alternate calculations.
Deferring taxes and accelerating deductions are both desirable privileges for corporate taxpayers, for obvious reasons. It seems counterintuitive, but the authors suggest reversing these behaviors. Income should be declared in years qualifying for a 20% tax rate, and deductions put off until the corporation reaches a 38% tax rate.
On the whole,