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Posted by Eric on January 4, 2007, 8:54 pm
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My family owns an S-Corp with seven employees. We have a
sharp cash flow cycle due to a reimbursable lag in our
industry. Because our ARs during the first of the year take
longer than normal to get paid, our cash income drops
significantly from Jan-May, and then builds back during the
rest of the year. On paper, we are profitable throughout the
year. It is purely a cash issue. Because it is an S-Corp,
and he will be taxed on retained earnings anyway, my father
takes cash out of the company in December, only to
personally loan it back to the company Jan-May. Is there a
way to keep this cash in the company-perhaps in some sort of
special reserve account-without it being classified as
retained earnings? Obviously, if this is a possibility, the
cash we would use in year 1 to establish that account would
be retained earnings, and taxable as such. After that
however, if we drew down that account and then rebuilt it to
a set level each year, would that cash be considered
retained earnings, or some type of operating asset/account
of the company? Obviously, if we ever increased the amount
to be maintained in that account, the delta of the increase
would come from taxable retained earnings, but would the par
level amount be taxed as retained earnings if it were
carried over from the previous year?
Many thanks,
Eric
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Posted by Benjamin Yazersky CPA on January 6, 2007, 12:21 am
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> My family owns an S-Corp with seven employees. We have a
> sharp cash flow cycle due to a reimbursable lag in our
> industry. Because our ARs during the first of the year take
> longer than normal to get paid, our cash income drops
> significantly from Jan-May, and then builds back during the
> rest of the year. On paper, we are profitable throughout the
> year. It is purely a cash issue. Because it is an S-Corp,
> and he will be taxed on retained earnings anyway, my father
> takes cash out of the company in December, only to
> personally loan it back to the company Jan-May. Is there a
> way to keep this cash in the company-perhaps in some sort of
> special reserve account-without it being classified as
> retained earnings? Obviously, if this is a possibility, the
> cash we would use in year 1 to establish that account would
> be retained earnings, and taxable as such. After that
> however, if we drew down that account and then rebuilt it to
> a set level each year, would that cash be considered
> retained earnings, or some type of operating asset/account
> of the company? Obviously, if we ever increased the amount
> to be maintained in that account, the delta of the increase
> would come from taxable retained earnings, but would the par
> level amount be taxed as retained earnings if it were
> carried over from the previous year?
S corporations don't have retained earnings, unless they
were a C corp previously.
Perhaps you need to consult with your CPA.
Distributions, loans etc are well beyond the scope of what
can be discussed here. Cash flow & taxable income can vary
greatly from each other.
___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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Posted by Stuart A. Bronstein on January 7, 2007, 11:11 pm
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>> My family owns an S-Corp with seven employees. We have a
>> sharp cash flow cycle due to a reimbursable lag in our
>> industry. Because our ARs during the first of the year take
>> longer than normal to get paid, our cash income drops
>> significantly from Jan-May, and then builds back during the
>> rest of the year.
>> Is there a way to keep this cash in the company-perhaps in some
>> sort of special reserve account-without it being classified as
>> retained earnings?
> S corporations don't have retained earnings, unless they
> were a C corp previously.
When he talks about "retained earnings" I think he means net
taxable income. The term "retained earnings" is a specific
term of art and is not the same as taxable income.
I suspect the answer to the specific question is no you
can't shift S- corp earnings from one year to the next.
Your father's taking out the money (or leaving it there, for
that matter) should have no effect at all on his or anyone
else's tax.
> Perhaps you need to consult with your CPA.
Excellent advice.
Stu
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by San Diego CPA on January 7, 2007, 11:11 pm
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> My family owns an S-Corp with seven employees. We have a
> sharp cash flow cycle due to a reimbursable lag in our
> industry. Because our ARs during the first of the year take
> longer than normal to get paid, our cash income drops
> significantly from Jan-May, and then builds back during the
> rest of the year. On paper, we are profitable throughout the
> year. It is purely a cash issue. Because it is an S-Corp,
> and he will be taxed on retained earnings anyway, my father
> takes cash out of the company in December, only to
> personally loan it back to the company Jan-May. Is there a
> way to keep this cash in the company-perhaps in some sort of
> special reserve account-without it being classified as
> retained earnings? Obviously, if this is a possibility, the
> cash we would use in year 1 to establish that account would
> be retained earnings, and taxable as such. After that
> however, if we drew down that account and then rebuilt it to
> a set level each year, would that cash be considered
> retained earnings, or some type of operating asset/account
> of the company? Obviously, if we ever increased the amount
> to be maintained in that account, the delta of the increase
> would come from taxable retained earnings, but would the par
> level amount be taxed as retained earnings if it were
> carried over from the previous year?
Your question as stated shows a fundamental misunderstanding
of S Corp accounting and taxation. Also, there are many
factors not addressed in your question that have significant
impact on the answer. You should waste no time in
consulting with an experienced CPA. It will be money well
spent.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Katie on January 7, 2007, 11:11 pm
Please log in for more thread options Eric wrote:
> My family owns an S-Corp with seven employees. We have a
> sharp cash flow cycle due to a reimbursable lag in our
> industry. Because our ARs during the first of the year take
> longer than normal to get paid, our cash income drops
> significantly from Jan-May, and then builds back during the
> rest of the year. On paper, we are profitable throughout the
> year. It is purely a cash issue. Because it is an S-Corp,
> and he will be taxed on retained earnings anyway, my father
> takes cash out of the company in December, only to
> personally loan it back to the company Jan-May. Is there a
> way to keep this cash in the company-perhaps in some sort of
> special reserve account-without it being classified as
> retained earnings? Obviously, if this is a possibility, the
> cash we would use in year 1 to establish that account would
> be retained earnings, and taxable as such. After that
> however, if we drew down that account and then rebuilt it to
> a set level each year, would that cash be considered
> retained earnings, or some type of operating asset/account
> of the company? Obviously, if we ever increased the amount
> to be maintained in that account, the delta of the increase
> would come from taxable retained earnings, but would the par
> level amount be taxed as retained earnings if it were
> carried over from the previous year?
I thought we had dealt with this question pretty thoroughly
over on misc.taxes, where it was first posted. As we said
there, the whole concept of "taxable retained earnings" has
no meaning in the income tax context (except for the
accumulated earnings tax, which applies only to C
corporations and is seldom imposed).
It does occur to me, however, that if you are operating in a
state that imposes its franchise tax (measured by net worth)
on S corporations, as several do, then there might be some
advantage to reducing the value of the capital accounts
before year end. You'd have to look at the particular
state's rules, however, to see whether a loan to a
stockholder would be included in the franchise tax base. If
it is, the stockholder loan would have no tax effect for
franchise tax purposes either.
Katie in San Diego
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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