S-Corp tax question

[morkus64]

I have a quick question about retaining money in an S-Corp at the end of the year. I understand that any profit gets taxed regardless of whether or not it is actually distributed, but is money that won't be profit taxed? My design business gets paid a deposit from clients which gets paid out to contractors, buys materials, etc. At the end of the year, I may have funds which are earmarked for a project, but haven't been paid out yet (because we aren't at that stage in the project or whatever). How does that money get dealt with?

TIA!

FOLLOW UP: Can anyone give me some examples of common combination methods for accounting?

 

[bbhaag]

Generally money sitting in the account gets taxed. Have you asked your CPA about what the best approach is to handle a surplus?

 

[highland145]

I don't see how operating $$ can get taxed. It's not profit, it's not rolling onto you via your k-1. It's net even your $$.


And I'm not a CPA.

 

[skull]

As a sole-proprietor I can can do cash method or accrual method. Don't quote I'm not a CPA. Accrual accounting method would take care of your problem I believe. Cash method I believe the money would have to be taxed.

 

[Stifko]

I leave money in an account for a S corp at the end of the year. There is a big tax bill and an insurance bill that I have to pay every January so I save up for those. As long as the expenses are more than the revenue then there is no profit. It should not matter about what is in the bank.

 

[drbrock]

I am a CPA and you are basically screwed if you are Cash Method. One of the worst parts of cash basis. Since you have dominion over the cash, it is income. You can technically do whatever you want with the cash right now as pay bills or earn interest in an account.

However, your CPA might disagree with me and put it in a non accrual liability account. I wouldn't do that but going to a CPA is like going to a doctor. Each have their own opinions.

 

[morkus64]

I am a CPA and you are basically screwed if you are Cash Method. One of the worst parts of cash basis. Since you have dominion over the cash, it is income. You can technically do whatever you want with the cash right now as pay bills or earn interest in an account.

However, your CPA might disagree with me and put it in a non accrual liability account. I wouldn't do that but going to a CPA is like going to a doctor. Each have their own opinions.

Thanks! This is super useful.

 

[jayzds]

I am a CPA and you are basically screwed if you are Cash Method. One of the worst parts of cash basis. Since you have dominion over the cash, it is income. You can technically do whatever you want with the cash right now as pay bills or earn interest in an account.

However, your CPA might disagree with me and put it in a non accrual liability account. I wouldn't do that but going to a CPA is like going to a doctor. Each have their own opinions.

^^ This...
I would not play those games that some accountants/CPA's/EA's like to play. The net income/profits are all taxable to you. You should have a W-2 and paid in some Federal Withholding while as an S-Corp anyways. Obviously it probably would not be enough but, could help if done correctly.

 

[highland145]

I am a CPA and you are basically screwed if you are Cash Method. One of the worst parts of cash basis. Since you have dominion over the cash, it is income. You can technically do whatever you want with the cash right now as pay bills or earn interest in an account.

However, your CPA might disagree with me and put it in a non accrual liability account. I wouldn't do that but going to a CPA is like going to a doctor. Each have their own opinions.

Could he set up some type of escrow account to avoid it?

 

[CPA]

OP, you are describing Unearned Revenue which is a balance sheet item, if you are using accrual based accounting. If you are and have it recorded as such, it is not taxable until you have earned that revenue (time of service or over course of contract).

If you are cash basis, then it's taxable when you received the cash, NOT when you earned the revenue.

 

[drbrock]

Could he set up some type of escrow account to avoid it?

I don't think you can. But if you have to setup a special account to avoid taxation on unearned revenue then I would think about the method of accounting.

Crazier things have happened. I was working with a CPA today who setup a Florida S Corp that is soley used to charge management fees to a partnership to reduce state taxes. Clever idea and IMHO morally wrong but hey if it works, DO IT!

 

[morkus64]

Thanks for the advice everyone!

 

[dullard]

Unless you have crazy tax bracket swings, it all basically balances out in the end.

Suppose you were paid $500 in December for an item you will buy at $500 in January. In the simplistic view, you have no gain or loss. But with the cash method, it is a $500 gain this year (taxed for $125 for 25% tax bracket) and a $500 loss next year (lowers taxes by $125 the next year).

Sure, you could have received ~0.1% interest on that tax amount over the course of the year (a whopping 12 cents!). But, it really doesn't matter much unless you are talking really big numbers. And in that case, you wouldn't be asking here.

Now, if you do have crazy tax bracket swings, then milk it. Put your gains on your year with low tax rates and your expenses on the years with the high tax rates.

 

[highland145]

I don't think you can. But if you have to setup a special account to avoid taxation on unearned revenue then I would think about the method of accounting.

Crazier things have happened. I was working with a CPA today who setup a Florida S Corp that is soley used to charge management fees to a partnership to reduce state taxes. Clever idea and IMHO morally wrong but hey if it works, DO IT!

I'm sure lawyers hold over a large amount from year end for estates/escrows/custody/etc and aren't paying a dime. There should be some vehicle. But...I don't know squat. Meh.

 

[morkus64]

Thanks for the advice everyone! I had a follow-up question: I've been doing some research based on the feedback you all have and was wondering if anyone could give me some examples of combination / hybrid accounting. Also wondering about things like travel where the airfare is bought one year and the travel is done the next.