For an S-Corp how is the cash at years end declared in taxes?

Question

Is my understanding correct, that for an S-Corp that if at the end of the Year, you have operating income in the bank (let's say $10K), and you have 3 partners (33% each), is that amount applicable to their taxes even though they will not get paid from it. Does that count towards the shareholders income taxes, even though they will not receive that money, ie. meaning that money is slated to be used for the business expensese of next year operating budget. What is the proper way to declare it?

Thank you for your answers, they are hitting the spot, but some confusion still lingers. First off , Everything is noted in quickbooks, and those monies are basically what is left over after all the expenses are accounted for,most of it is happens to be cash on hand. I guess I still dont understand what is meant by shareholder basis in answer #2 . If the shareholders have been paid through normal disbursement thoughout the year, why would the money that is NOT disbursed , money that will be used for operating income for the next year , why would that be taxed.? Isn't that what retained earnings are for? I guess put another way, doesn't the IRS have a provision for an S-Corp's continuing operation into the next year , would it make sense to put those monies into a misc expense in the ledger?

Answer 1

An S-corp is a pass-through entity (somebody correct me if I'm wrong). Income (profit) at the end of the year that isn't distributed to shareholders is still taxable by the shareholders on a pro-rata basis. Each gets their own separate K-1 showing where to place items of income and deductions. If the business made a profit, the shareholders will have to pay a tax regardless if they get any money. Of course, their basis in the business will grow which means down the road, they will be able to get more money out of the business without paying tax.

Example: 3 people own 33 1/3% of an S-corp. Each puts in $10,000. Each person's basis is $10,000. If they take that $10,000 out, they will owe no tax on it (it's already been taxed when they earned it originally)

If the corp. has a net profit of $60,000 ($20,000 per person)each person must claim this $20,000 as "non-qualifying dividends". If no money is paid out to the shareholder, their basis goes up by the $20,000. Now, the first $30,000 they pull out will be tax free (their original $10,000 plus the $20,000 profit).

You see, you don't pay tax on something you don't get, and you don't get something you don't pay tax on. The IRS is pretty good this way.

Additional:

With normal corporations, otherwise known as C-corps, retained earnings are NOT taxable to the shareholders. The C-corp pays tax on all profits, then if they want, distribute some of the to the shareholders who than pay taxes on the dividends. This is what is knows as double taxation.

With S-corps, there is no tax owed by the corp itself. All earnings are passed through to the owners regardless if they take the money out or leave it in. While this avoids the double taxations, it does cause immediate tax liability to all shareholders....and there is no qualified dividends like you can have with C-corps.

Money in the bank isn't taxed no matter what type of it is. It is the profit that is taxable. You have to know how to accurately do the tax books for the corp to calc the profit. If you are lost on this, it is best to get a tax accountant. Quick books can help, but nothing beats a compitent person. You don't need to "hide" the money in the bank.

Am I answering your question? Am I making any sense?

Answer 2

You can't go by what's in the bank to determine what your taxable income is. You need to keep good track of your income and expenses, preferably with a software like Quickbooks. Depending on whether youre on the cash basis or accrual basis can determine what your net income is. Then you would need to prepare corporate tax returns. Your "book" income is not necessarily the same as your "tax" income. Youll need a balance sheet and income statement to prepare the tax return (or provide to your accountant).

Anyway, my point is that youre not necessarily paying tax on whats in the bank. Your K-1s from the corporate tax return will show you what income is taxable to report on your personal tax return.

Any money distributed to the shareholders is only taxable if it exceeds your basis in the company.

Answer 3

It's fully taxable to the shareholders whether they receive the income or not.