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I'm using TurboTax for my taxes (which of course are due tomorrow), and my wife's S Corp (50% owner) had a profit of roughly $14k, which they did not withdraw. It stayed in the corporate bank account, and was later used to pay down debts.

The accountant gave us a K-1 form, showing the $7k as her portion of the income. When I enter it into TurboTax it ups the tax roughly 50% of that amount. I tried testing it by changing the amount to $1000 and the tax goes up by about $500.

I really don't understand what's going on or why this is happening. She didn't even take that money home, and it's taxing it at a rate higher than anything else we pay? Any suggestions or clarifications?

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That's really not something that can be answered based on the information provided. There are a lot of factors involved: type of income, your wife's tax bracket, the split between Federal and State (if you're in a high bracket in a high income-tax rate State - it may even be more than 50%), etc etc.

The fact that your wife didn't withdraw the money is irrelevant. S-Corp is a pass-through entity, i.e.: owners are taxed on the profits based on their personal marginal tax rates, and it doesn't matter what they did with the money. In this case, your wife re-invested it into the corp (used it to pay off corp debts), which adds back to her basis.

You really should talk to a tax adviser (EA/CPA licensed in your State) to learn how S-Corps work and how to use them properly. Your wife, actually, as she's the owner.

  • That's exactly what I wanted to know. Thanks! We have a CPA, but he's practically useless. We're looking for a new one now. – John W. Oct 15 '15 at 13:10

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