- quote -

This is why an S corporation or any other small business
form used by a solo contractor works better on a cash basis.

If you don't receive progress payments, but you have to
recognize income as you perform the work, you are stuck
paying current-year taxes on out-year income. Bummer.

I believe it's also a good idea to be careful with
multi-year contracts in such a business, because you may be
forced into percentage-of-completion accounting for these,
effectively putting you on accrual even though you run your
business cash-basis. If you're in the fortunate position of
being offered a multi-year contract, you will need to (and
should be able to) obtain financing that will let you
perform the contract and pay off the bank when you collect.

--
Chris Green

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- quote -

Following this thread leads me wondering whether it happens
often that an S corporation on the accrural basis 'reports
out' far more income at the end of the year then it can
possibly distribute.

In other words, I complete a major project in December and
send out a bill, and have a huge income/accounts receivable.
Now comes the end of the year, and a cash basis shareholder
has to report and pay tax on this income, yet no money may
be in the hands of the corp (to distribute out) for many
months.

Is this a problem that does in fact happen frequently in the
real world, or yes it is a problem, but it's not usually
catastrophic to the shareholder; or is my understanding of
the rules incorrect?

Rick Bryan
New York, NY


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"John" <johnfofawn[at]hotmail.com> wrote:

- quote -

WRONG! S corps retain earnings all the time. Frankly, I'd
be amazed at an S corp that managed to ZERO out retained
earnings every year. Besides, under your theory, what
happens to the S corp retained earnings when the company
operates at a loss for a particular year?

- quote -

Wrong again - income is income, deposits may be income or
loans or reductions of expenses.

- quote -

Also don't forget that, among other things, pension
contributions are calcuated based on earned income.

- quote -

This you have absolutely correct!

- quote -

The owners of a pass through entity - S Corp, LLC, or
Partnership - pay tax on all the distributable income of the
entity regardless of how much cash is disbursed to the
owners, if any is disbursed at all.

Gene E. Utterback, EA

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johnfofawn[at]hotmail.com (John) wrote:

- quote -

S corps don't have retained earnings as that's understood in
C corp terms, they have shareholder basis. Basis is the
shareholder's contributions (including shareholder loans to
the corp, which have to be tracked separately), plus the
shareholder's share of net income, less distributions to the
shareholder.

(S corps that used to be a C corp have an "accumulated
adjustment account" that carries retained earnings from the
C-corp period of the corp's existence. If you have such an S
corp, seriously consider retaining professional assistance.)

- quote -

It doesn't have to be distributed. Your share of the corp's
net is added to your basis, and you are taxed on it whether
or not it is distributed.

You can make distributions at any time, and S corporation
distributions are not taxable income.

- quote -

You're right: it would be quite imprudent to do so. A more
appropriate method is to retain so much as is needed to meet
your working capital needs, then distribute the balance.

--
Chris Green

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"John" <johnfofawn[at]hotmail.com> wrote:

- quote -

I really suggest you hire an accountant to handle your
s-corp going forward. Without trying to sound too
condescending, you don't understand the operation of an
s-corp.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"John" <johnfofawn[at]hotmail.com> wrote

- quote -

Says who?

- quote -

No, the net profit is income to the owners, regardless of
whether or not it gets withdrawn.

- quote -

Distribution of profits. They aren't treated like dividends
for tax purposes.

- quote -

The income tax is still due, regardless of if it's withheld
from a paycheck or not.

- quote -

Actually the law says that too.

- quote -

More or less. In these economic times, you may need to pay
yourself less to make ends meet.

- quote -

Because all the profits do not have to be distributed for
starters, and secondly, the money in the bank has no
relation to the profits on the bottom of the return.

- quote -

True.

--
Paul A. Thomas, CPA
Athens, Georgia
taxman at negia.net

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- quote -

The money is distributed to you for purposes of being taxed
in the year it was earned. The corporation may retain
previously taxed income. This could be a loan to the
corporation or represent an increase in your basis.

"Jack" - John H. Fisher - TaxService[at]aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=

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- quote -

You are misunderstanding the nature of S corporation
earnings. The income of the corporation is taxed to you
whether or not the earnings are distributed. As you point
out it is inconvenient to have to zero out the bank
account-it puts quite a crimp in paying business expenses.
So that is not required. You distribute earnings at a rate
that permits the company to maintain sufficient working
capital for its operations.

Example: the company earns $40,000 after expenses. You
decide that you need at least $10,000 in the bank to pay
upcoming expenses, but you also had to build up inventory by
another $10,000. That leaves only $20,000 that the company
can afford to distribute to you. You are taxed on $40,000,
but can distribute only $20,000 of it. At some later year
this will balance out.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: tom[at]tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

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I know this must be a stupid question, but I can't figure it
out.

So I understand that my S-Corp can not retain earnings.
Therefore all money that goes in to the company, must be
recorded as income to the owner(s). As the owner I can draw
a salary and I can receive dividends. I want my salary to be
as low as possible because I have to pay withholding and
unemployment on this money (I don't have to pay these for
the dividends). However, I can't make my salary $1/year
because I have to receive fair compensation (my words). So
if I'm doing work that would normally be paid at $50k per
year, I need to pay myself $50k per year.

So if all the money earned by the company at the end of the
year must be distributed to me (the owner) then is the bank
account balance on Jan 1, 2005 $0? If not, why not?

I don't think this would be the case as it would be terribly
inconvenient to not have money to pay bills in 2005 until
money is earned in 2005.

THANKS!
John

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