11 Good point about the tax consequences, but isn't there a way to avoid some of these issues? I thought I read something about a post-termination transition period where you can still distribute AAA balances tax-free?

4 Yes, that's correct. After S corporation status ends, there is a post-termination transition period (generally 1 year after the last day of the last S corporation tax year) where shareholders can still receive distributions from the former S corporation's AAA tax-free to the extent of their stock basis. This can be really important for planning purposes. Some shareholders mistakenly believe all their distribution options end when S status is revoked, but this transition period provides a window to distribute accumulated S corporation earnings without dividend treatment under C corporation rules.

14 I dealt with something similar and we ended up going this route. The key was proving that we never operated as an S corp (no distributions, no K-1s issued, etc.) and that it was an honest mistake in the election. Saved us from having to do the split-year filings.

This is really helpful advice. I hadn't thought about documenting the strategy formally. Is there a specific format you'd recommend for this kind of business plan? Also, does the board approval need to happen annually or just once when implementing the strategy?

There's no required format, but I'd recommend including projected capital needs, specific growth milestones, timeline for expansion, and how the retained earnings will be used. Make it clear this is a temporary strategy until the business can support you full-time. Board approvals should definitely happen annually. At minimum, you should have annual minutes documenting review of the compensation strategy and business progress. Each year, note how the retained capital is being used toward your stated goals and reaffirm the strategy. This creates a pattern of consistent business purpose rather than looking like an afterthought if questioned.

YES! My brother-in-law got absolutely hammered for this exact situation. Ran his consulting S-corp for 2 years taking zero salary and only distributions. Got audited, and the IRS reclassified ALL his distributions as salary, meaning he owed back payroll taxes plus penalties and interest. Cost him over $30k when all was said and done. They specifically target S-corps for this issue because it's such a common tax avoidance strategy.

That's an interesting approach I hadn't considered. Would that be simpler to manage than tracking all these loan amounts and interest calculations? What kind of documentation would we need for a cost sharing arrangement?

A cost sharing arrangement could be simpler operationally but requires careful upfront documentation. You'd need a formal agreement specifying how costs will be allocated (usually based on projected benefits like expected sales or profits in each territory), which costs qualify for sharing, and how developed IP will be owned. The documentation is actually quite extensive. You'll need economic analysis to support your allocation method, regular documentation of actual costs incurred, and annual true-ups if estimates differ from reality. The IRS scrutinizes these arrangements closely under Section 482, so you'd want to prepare a transfer pricing study to support your approach.

We designated our intercompany loans as long-term investments so the foreign currency gains/losses are reported as Other Comprehensive Income instead of hitting our P&L directly. Talk to your accountant about whether that approach might work for your situation.

You know what, that could actually be part of the problem. I didn't realize the W-4 had changed that significantly. I did fill out a paper form when I started and I remember putting "0" for allowances, but maybe that wasn't even the right field on the new form. I definitely didn't check anything about multiple jobs because my first job had already ended when I started this one. Do you think that could have somehow triggered zero withholding?

That could absolutely be the issue. The new W-4 doesn't have a place for "0 allowances" anymore, so if you were filling out an old form or using old terminology on the new form, it might have confused your payroll department. Even though your jobs weren't simultaneous, the Step 2 checkbox helps the withholding system account for your total annual income. Without it checked, the system might have been withholding as if this was your only income for the year, and depending on your pay rate, that might result in little or no withholding if the projected annual amount would be under the standard deduction.

That's a good point. If they gave you a W-2 but treated you as an independent contractor for withholding purposes, that's definitely something the IRS would be interested in knowing about. Companies can get in big trouble for misclassifying employees.

They definitely gave me a W-2, not a 1099. And they are withholding Social Security and Medicare taxes correctly - it's just the federal income tax that's showing $0. So I don't think I'm being classified as an independent contractor. It seems more like some kind of specific error with just the federal income tax withholding.

Thank you for mentioning this! I had no idea this was a thing. I'll definitely ask our CPA about the Voluntary Disclosure Program. Is there anything specific we need to do to qualify for this?

You're already taking the right first step by working with a CPA to file all the past returns. The key requirements are that you're coming forward voluntarily (before the IRS contacts you about the unfiled returns) and that you're filing accurate returns for all missing years. Make sure your CPA specifically requests penalty abatement using Form 843. They should cite "reasonable cause" and explain the circumstances that led to the unfiled returns. Having professional help with this process is crucial because the specific language and approach matter a lot in how the IRS responds.

That's not entirely accurate. The IRS doesn't immediately put liens on property, especially if you're voluntarily coming forward. They typically only place liens after multiple notices and lack of response or cooperation.