Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 11-26-2012, 01:10 PM
Junior Member
 
Join Date: Nov 2012
Posts: 1
Corporation retained earn zeroed out

Can the corporation pay out bonuses to officers (2 officers) to help zero profits for the year, but the officers loan the corporation back the money, so it doesn't effect the cash flow for the corporation? Is there a way to reduce the profits w/o affecting cash. Currently, going to show a profit over $50,000 and want to reduce it with bonuses, but are tight on cash? Any other options? Suggestions?



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 11-26-2012, 08:37 PM
Moderator
 
Join Date: Oct 2010
Posts: 5,258
“Can the corporation pay out bonuses to officers (2 officers) to help zero profits for the year, but the officers loan the corporation back the money, so it doesn't effect the cash flow for the corporation? “---->Correct. Many small to medium reg corporations “zero out” their earnings. Zeroing out means to claim salaries and bonuses, plus other deductions, that significantly reduce the annual profit (retained earnings) of the corporation. In case of the need for liquidity, the amounts taken as salary and bonus can be loaned back to the corporation. Such loans should be documented with corporate minutes and promissory notes with reasonable rates of interest, often the applicable federal rate. It is a good idea when forming an entity, or when doing long-range planning for potential profits, to document in the minutes resolutions for bonus plans for the officers of the corporation so that, if later, officers' compensation is attacked by the IRS as being too high, there is a documented basis for the deductions for bonuses, unless the bonuses are proportional to stock ownership. Another way of justifying accumulated earnings is to show through corporate minutes that there is a future need for such retained earnings; for example, building a new factory, introducing a new product line, or having a cash reserve for an expected business downturn. Unfortunately, corporate managers often do not become aware of a potential accumulated earnings tax liability until the issue is raised in an audit.The ability of the IRS to tax the corporation for accumulating too much retained earnings and, conversely, to attack the corporation for distributing too much in the form of deductible compensation, leads to the need for planning. For smaller companies. reported profits result in retained earnings, a type of equity. As years roll by, these accumulated after-tax earnings increase the retained earnings account, unless they are distributed. Retained earnings in a C corporation will eventually be taxed again, either as dividends, salary, bonuses or as liquidating dividends when the corporation is terminated. Of these four choices, the most favorable is a distribution of salary and bonuses, which are deductible as compensation at the corporate level, although they are subject to additional employment taxes. Dividends, as most know, are not deductible at the corporate level and are often frowned upon in smaller entities for their lack of deductibility.

“Is there a way to reduce the profits w/o affecting cash. Currently, going to show a profit over $50,000 and want to reduce it with bonuses, but are tight on cash?”-----> As described above, the amounts taken as salary and bonus can be loaned back to the corporation and do not affect cash situation.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply



Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
What to do with Retained Earnings? Tex Geoas C-Corporation 3 01-26-2012 01:39 PM
Special Deduction for ppl that earn 45.000 or less? Liona Income 0 02-28-2010 09:00 PM
retained earnings rdknight C-Corporation 1 11-21-2009 02:34 PM
Retained Earnings tellme S-Corporation 0 07-15-2009 09:18 AM
What is the significance of having Retained Earnings in a Corporation? bookkeeping C-Corporation 1 02-18-2007 08:07 PM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning
 
 
 

» Recent Tax Q&A
No Threads to Display.