Dr. Jacobs is a veterinarian who is the only shareholder of Jacobs Pet Center, Inc., an S Corporation, and he is a married individual filing a joint tax return with his spouse. The S Corporations income is most of his income on their tax return.The corporation offers services and sell pet related products. He also has 8employees working for him with wages of $500,000. Jacobs does not receive any regular payments from the corporation as compensation, but he withdraws funds as the need arises. During the current year, he withdrew $725,000, and the net income of the corporation is $900,000. The corporation does not deduct the $725,000 of withdraws, nor does Jacobs include it in gross income. Jacobs does, however, report the $900,000 from his S Corporation K-1 in gross income on his Schedule E prepared by his CPA. Because Dr. Jacobs has recognized the corporations income in his form 1040, he sees no reason to pay himself a salary. He justifies the treatment by arguing that he is not an employee (i.e., he is the owner) of the corporation, and that the Federal and State income tax consequences are identical.

Questions: Do you agree with Jacobs?

What are the issues with the position that Jacobs is taking if any?

What do you think he should do if you dont agree with Jacobs?

Would your answer change if the entity was an LLC or C Corporation?

What entity do you recommend for Jacobs?