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Author: BeenFooled Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: Leaving money in S Cospr at end of year Date: 5/24/2010 6:13 PM
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I run a small S Corp, of which I am the 100% owner and only employee. Very simple stuff: I get revenue, my payroll service does all payroll taxes and pays me, whatever's left over at the end of the year I usually get in the form of a Sch K distribution and next year everything starts again at zero. This has worked well for many years.

This year the company did quite well and I would like to keep some of the money in the company for use next year (I am planning to write up a bunch of patents and need to pay my patent agent & the patent office a fair chunk of change, among other things). I am not sure how to do this.... any clues, please?

Thank you!
BF
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110495 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/24/2010 6:29 PM
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What you do with the money and how you report things for tax purposes are two different things.

After toting up your net profit (income less deductible expenses), it doesn't matter what you do with the profits. You will pay taxes on them personally via the K-1 the corporation gives to you.

You can take out whatever cash you wish, or you can leave it in the corporation for future expenses (like patent attorneys).

So from a tax standpoint, there's really no change from what you've been doing in the past.

--Peter

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110497 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/24/2010 8:00 PM
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After toting up your net profit (income less deductible expenses), it doesn't matter what you do with the profits. You will pay taxes on them personally via the K-1 the corporation gives to you.

I think the implied question is "What do I do when I have a huge net loss next year? I have a bunch of income this year which is giving me a nice net profit this year, but I expect I'll have big expenses next year".

And I *think* the answer is a "loss carryback" which winds up with doing a revised tax form for this year to reduce this years income. BUT I'd look for an answer from an expert.

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Author: BeenFooled Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110499 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 6:33 AM
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Thanks for those posts. foo1bar did sort of get at the point that I was thinking of. Namely, one could imagine that if I pre-paid the lawyers this year it would reduce my taxable portion of the revenue this year (and avoid - again in theory - having to loan money to the company next year). I don't think I can really pre-pay (though I will look into it) so I am wondering what the next best thing is. Buy bullion in the name of the company? :)

Thanks again
BF

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110500 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 8:22 AM
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Thanks for those posts. foo1bar did sort of get at the point that I was thinking of. Namely, one could imagine that if I pre-paid the lawyers this year it would reduce my taxable portion of the revenue this year (and avoid - again in theory - having to loan money to the company next year). I don't think I can really pre-pay (though I will look into it) so I am wondering what the next best thing is. Buy bullion in the name of the company? :)

You're missing the point. If you think you'll have to lend the Corp money next year if you pay the lawyers then, you'll also have to lend the Corp money if you pay now. Put differently, if the money is in the Corp now, it can be there next year. The distribution of profits reported on the K-1 does not represent cash taken out of the Corp.

Ira

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110503 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 1:26 PM
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Just leave the cash in the corporation's bank account and pay the expense next year (or whenever it needs to be paid). The amount you withdraw from an S corporation is completely unrelated to how much tax you pay each year.

You pay tax on the corporation's net income whether it is distributed to you or not. So leave the money in, take the money out, it makes no difference.

Now if the expenses next year exceed the income, the S Corp would show a loss. Assuming you have sufficient basis in the corp, you can deduct that loss personally. And if that loss is big enough, it might create a Net Operating Loss (NOL) on your personal return. An NOL can be carried back for at least two years (and sometimes as much as 5 depending on the year and the whims of Congress). That would reduce your income in some earlier year and get you a refund of some taxes paid in that earlier year.

I'd suggest you sit down with your tax pro to work out the best solution for your situation. I think you mentioned in your first post that you had a professional prepare your corp return. Get their input - they know your situation. And as a tax pro, I like it when clients actually ask me to help them plan out their taxes. The end result is usually much better than trying to go it on their own.

--Peter

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110504 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 1:38 PM
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The distribution of profits reported on the K-1 does not represent cash taken out of the Corp.

I think that misses the OP's question.
I think he's concerned with how to minimize overall taxes for 2010 and 2011, knowing that 2010 has significant profit, while 2011 will have significant expenses.
Should he try to move some expenses into 2010?
Does it matter?

My guess is it might not matter once you get to time where you're filing taxes for 2011 (eg. April 2012) - other than a possible interest-free loan to the US govt.

Here's one more spin on it - wouldn't he be better having a more level income for this year and next year? (ie. not in a higher bracket this year and a much lower one next year) Because I'm thinking if he's just slightly profitable for 2011, he doesn't get to carry-back anything to 2010. But that might mean that 2011 his final incremental tax bracket is much lower than his 2010 bracket.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110505 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 2:48 PM
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I am planning to write up a bunch of patents and need to pay my patent agent & the patent office a fair chunk of change,

One other thought - off the top of my head, I'm not sure that the costs of perfecting a patent are deductible immediately. They may have to be capitalized and amortized over the life of the patent.

That's not an area I work in, so I'm not up on all of the ins and outs of patents. I just have this thought in the back of my mind that they have to be capitalized.

If that's correct (and it may not be), then you'll write off the cost of the patent agents, attorneys, and other costs over a number of years instead of all at once.

--Peter

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Author: BeenFooled Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110506 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 3:36 PM
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Yes, irasmilo, I am pretty sure I am missing something. Let me think out loud here for a minute.

Scenario 1.
End of year, $10,000 left in company, cash. Sch. K distribution to me $10,000 counts as my income, I pay taxes on it, so I usually write myself a check for that amount. My total in pocket $5000 (say marginal combined 50% State and Federal tax rate - round numbers)
Next year I loan the Co. $10,000 to pay lawyers.
Total cost: $15,000 (incl tax).

Scenario 2.
End of year, $10,000 left in company, cash. I leave it there somehow.
Next year I pay lawyers with it.
Total cost: $10,000.

Where am I going wrong? (Probably the bit where the patent guy tries to save money doing his own company taxes... :) but still!

Thanks again
BF

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Author: BeenFooled Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110507 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 3:47 PM
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Sorry. I had not seen the subsequent posts when I posted the above. No I don't have a tax person doing this for me - a few years back I did and it was too expensive (worked out to about $5k/year, which at the time was about 10% of my revenue.... would be a little less now I guess, but still a difficult cut to swallow!).

I am still not seeing why I would leave the cash in the corp if I paid taxes on it. This is how I think of it:

Same $10,000 left at end of year.

Scenario 1.
I get a $10,000 check with my Sch. K., pay $5,000 tax, final take home $5,000. (this is what I always do).

Scenario 2.
The $10,000 still counts as my income and I pay taxes on it, but this time as you suggest I leave the remaining $5,000 in the corp. Suppose next year nothing happens in the corp and at the end of the year I still have the $5,000. Doesn't that show up as the 'ending balance' of my checking account, and hence on my Sch. K, and hence I pay another round of taxes on it?

In the meantime, point taken about might have to amortize patent costs over a few years, I'll look into it. And foo1bar is right, I am trying to plan income (higher than normal this year due to patent sale) and expenses and taxes over this and next year to see if I can come out ahead. The basic problem is the bumper crop of cash this year from the sale - I wonder if I could somehow recognize THAT over a number of years, though I (patent guy rather than tax guy) don't see how.

Thanks for the discussion.
BF

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110508 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 3:48 PM
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Scenario 2.
End of year, $10,000 left in company, cash. I leave it there somehow.


You just leave it there. You still have to pay taxes on it - so you come up with the $5k for taxes from some other source.

Next year I pay lawyers with it.

Total cost: $10,000.

Plus $5k in taxes, bring the total to $15k, just like scenario 1.

--Peter

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110509 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 3:54 PM
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Suppose next year nothing happens in the corp and at the end of the year I still have the $5,000. Doesn't that show up as the 'ending balance' of my checking account, and hence on my Sch. K, and hence I pay another round of taxes on it?

No, no no NO NOOOO!!!! ;-)

The balance in the corp checking account has absolutely nothing to do with the distribution of income shown on the K-1.

The K-1 shows income minus expenses. Income: what you collect from your customers. Expenses: what you pay out to those providing goods and services to the corp (including the salary to you). The balance in the checking account doesn't enter into that equation.

--Peter

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Author: BeenFooled Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110510 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 3:54 PM
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Peter:
"Scenario 2.
End of year, $10,000 left in company, cash. I leave it there somehow.

You just leave it there. You still have to pay taxes on it - so you come up with the $5k for taxes from some other source.

Next year I pay lawyers with it.

Total cost: $10,000.

Plus $5k in taxes, bring the total to $15k, just like scenario 1."

Yes, that gets to the crux of it. If I paid the lawyers $10K this year, I would never see that $5K tax bill, and at the end of the day I would be $5K better off?

BF

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Author: BeenFooled Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110511 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 3:57 PM
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"The balance in the corp checking account has absolutely nothing to do with the distribution of income shown on the K-1."

OK I am pretty sure TurboTax S Corp asks me about that balance (at the beg and end of year), and I was further convinced this is where that info went. I will have to check (and obviously you will be proved right...). Might take me a while, I am 9000 miles from my taxes (both geographically and mentally obviously).

BF

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110512 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 4:23 PM
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OK I am pretty sure TurboTax S Corp asks me about that balance (at the beg and end of year),

Yes, accountant-in-a-box would ask for that. But that is because part of the tax return is a balance sheet for the corp. That shows what the corp owns and what is owes to others at a point in time. (In the case of a tax return, two points in time: the beginning and end of the year.)

If the gross receipts or total assets are under some figure, you are not required to complete the balance sheet. (I don't recall the figure, because I always complete the balance sheet, even when it's not required.)

I assume accountant-in-a-box will strictly follow that instruction, so you probably don't have a balance sheet on your return.

The basic purpose of showing a balance sheet is to help out the IRS audit your return. It can tell the auditor in a glance if the person preparing the return has any clues about bookkeeping. And with further analysis, it can show where potential additional income and/or expenses are hiding.

I'm guessing AIAB also asked about any loans you had or other liabilities of the company. It probably also asks about assets - equipment, furniture, computers, things like that. Those all go on the balance sheet.

--Peter

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110514 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/25/2010 5:27 PM
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Peter:
"Scenario 2.
End of year, $10,000 left in company, cash. I leave it there somehow.

You just leave it there. You still have to pay taxes on it - so you come up with the $5k for taxes from some other source.

Next year I pay lawyers with it.

Total cost: $10,000.

Plus $5k in taxes, bring the total to $15k, just like scenario 1."

Yes, that gets to the crux of it. If I paid the lawyers $10K this year, I would never see that $5K tax bill, and at the end of the day I would be $5K better off?


No. Assuming the legal fees are deductible when paid, if you pay the legal fees now to avoid the $5K tax bill this year, your income will be $10K higher (or your loss $10K smaller) next year. The net result will be the same other than the time value of money (interest lost) and possible changes in income tax rates (my crystal ball is cloudy).

Ira

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Author: BeenFooled Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110517 of 121114
Subject: Re: Leaving money in S Cospr at end of year Date: 5/26/2010 11:17 AM
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"No. Assuming the legal fees are deductible when paid, if you pay the legal fees now to avoid the $5K tax bill this year, your income will be $10K higher (or your loss $10K smaller) next year. The net result will be the same other than the time value of money (interest lost) and possible changes in income tax rates (my crystal ball is cloudy)."

Oh. Yeah. Duh. :)

Thanks for the help.
Off to research deductibility of patent expenses and prepayability of patent agents.

BF

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