Do S-Corp owners need to take salary/distribution if business operates at a loss?

Thanks for clarifying! That makes sense that my brother wouldn't need compensation since he's not active. One follow-up question - does it matter that I'm taking a salary while we're at a loss? And does the loss get split on our personal taxes according to ownership percentage even though I'm the only one getting paid?

You taking a reasonable salary while the company operates at a loss is completely fine and actually required since you're actively working in the business. The S-Corp loss will still flow through to both of you based on your ownership percentages on your K-1s, regardless of who takes a salary. The salary you receive is an expense to the business that actually increases the loss that gets allocated. Remember that your personal tax returns will reflect both your W-2 income from the salary and your share of the S-Corp loss, which may help offset some of your tax liability.

Does it actually explain the whole S-Corp loss situation clearly? My accountant gives me vague answers and I'm trying to understand if I need to keep taking a salary when my business is struggling.

I'm a bit skeptical about tax software handling complex S-Corp situations. Does it actually give personalized advice or just general information you could find on the IRS website?

It explains the S-Corp loss situation step by step including how losses flow through to your personal return and what documentation you need. It's not just general info - it analyzes your specific documents and gives personalized guidance based on your situation. As for personalization, it's actually quite detailed. You upload your business docs and it identifies your specific situation rather than just generic advice. It caught things in my case that I wouldn't have known to look for, like how my specific state handles S-Corp losses differently than federal.

How does this even work? I don't understand how a service can get you through to the IRS faster than just calling them yourself. Sounds too good to be true.

Yeah right. I've spent HOURS trying to reach the IRS about my business issues. There's no way some service magically gets priority access. They probably just auto-dial constantly and got lucky once.

It works by using an advanced calling system that navigates the IRS phone tree efficiently and holds your place in line. They don't have special access - they just handle the waiting part for you so you don't have to sit on hold for hours. The service doesn't get priority access. They literally just wait on hold for you using their system, then call you when they reach a human. I was skeptical too but they basically just save you from having to listen to the hold music for hours. You still talk to the same IRS agents everyone else does.

That's a good point about documentation. How exactly should we track this? My brother literally doesn't do anything in the business now, but he did help with some startup activities about 2 years ago. Should we have some kind of written statement?

You should definitely have formal documentation. I recommend creating a simple "duties and involvement log" that clearly outlines each owner's responsibilities and actual time involvement. Have both owners sign it annually. For your specific situation, create a document that explicitly states your brother's current non-involvement status, noting his past startup contributions were completed as of X date. Both of you should sign it and keep it with your business records. Also maintain meeting minutes showing he doesn't participate in operational decisions. This creates a clear paper trail if questions ever arise.

This! So many people get confused about S-Corp rules. The "reasonable compensation" requirement doesn't disappear just because you're not profitable. My tax guy says the IRS specifically looks for this during audits of S-Corps.