Retained Earnings – S Corporations

Retained Earnings – S Corporations

Although an S-Corporation does not have the excessive earnings tax issues that a C-Corporation, we do see many businesses, taxed as S-Corporations, that have large retained earnings.   Do you know why the IRS doesn’t have a problem when an S-Corporation has large dollars, or strike that, large numbers in the retained earnings account?  It’s simple.  You, the business owner, have already paid all the taxes due.   The S-Corporation has no corporate level tax, and you have already paid the individual income taxes on the one time business profit.

If you don’t remember, it went like this.  In 2007, your S-Corporation business had taxable net profits of $100,000, that number was reflected on your personal return, and you paid taxes on it.  But, because of cash flow issues, you only paid yourself $60,000.  The other $40,000 was reflected as retained earnings.  The concept of paying tax on $100,000 even though you only received $60,000, is clearly one of the negatives of being taxed as an S-Corporation.  As a side note, this situation can be avoided with better tax planning.

If the above situation sounds familiar, you might be staring at a financial statement that indicates you have hundreds of thousands of dollars in retained earnings.  The positive side is you have hundreds of thousands of after-tax dollars that is yours for the taking – tax free.  The cruel reality is you don’t have the “actual” cash to take it out.  Try putting $100,000 of retained earnings in your personal bank account without the check to go with it.

The good news, with better tax planning, in addition to better business revenue and profitability, you can develop a plan to get these tax free dollars out of the business over time.  The plan must include the payment of a reasonable salary amount in addition to the tax free distributions.

What’s the answer – better and proactive tax planning!

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.
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