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

A sole proprietor is not entitled to tax deductions on salary paid to himself because these payments are not business expenses. When a sole proprietor pays himself a salary, he merely is transferring funds from a business account he owns to a personal account he owns. In Sole proprietorship, the implication of tax deduction is not different, as he can treated as simple income on your personal income tax return.You will be taxed for the full profits of your business, even if you have not personally withdrawn the money. That means that even if the money is being held in a company account and may not be presently accessible, you are taxed as if it were in your personal account and the money were freely available. In the present scenerio, Dr Sanders is not entitled to tax deductions on salary paid to himself because these payments are not business expenses and he can treated as simple income on your personal income tax return.

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