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R. Klein, EA
R. Klein, EA, Accountant
Category: Finance
Satisfied Customers: 2882
Experience:  Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
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Regarding an LLC with year end profits. Any options on year

Resolved Question:

Regarding an LLC with year end profits. Any options on year end accruals for bonuses?
Submitted: 1 year ago.
Category: Finance
Expert:  R. Klein, EA replied 1 year ago.

fastfile :

Hello and thanks for asking your finance question.

fastfile :

How is your LLC taxed at the federal level? Sole Proprietor? Partnership? S-Corp? C-Corp?

Customer:

Partnership - it has salaried employees who get bonuses during the year and the partners get bonuses during the year via guaranteed payments.

fastfile :

I'm not sure what you mean by year-end accruals.

fastfile :

Under normal circumstances, the profits are pushed into Retained Earnings automatically. You either assign dollars to partner's equity accounts on 12/31 or it remains in R/E.

fastfile :

The partners will pay tax on the profits according to their respective shares whether it is allocated or not.

Customer:

Can employee bonuses be accrued at year end?

fastfile :

Employee bonuses are nothing but wages.

fastfile :

If you are an accrual basis, then you could. If you are cash basis, then not.

fastfile :

Yes, it would reduce current income.

Customer:

So for $40,000 in profit left over, the partners would have that reported on K-1 and taxed as income?

fastfile :

Employes count the money as income in the year they receive the cash.

Customer:

I mean the partners

fastfile :

If there was $40K AND you are on accrual accounting AND you allocate all of it to employee bonus, then there is no profit.

fastfile :

Otheewise, the unpaid out profit is shared and taxed to the partners

fastfile :

Profits do not equal distributions in many partnerships

Customer:

And the unpaid profit goes to R.E

fastfile :

Sometime distributions exceed profits and sometimes the other way around.

fastfile :

Correct

fastfile :

But, it should be properly allocated to the partners' capital accounts unless you will be using the R/E for something later.

Customer:

What do you mean distributions, out of capital acct?

fastfile :

Each partner should have a capital account (equity)

Customer:

Yes. so that reported profit to them that isn't paid is in their capital acct. This is the first year there is any profit

fastfile :

Tell me what you are trying to do?

Customer:

Reduce a $40,000 profit (after employees bonus accrual)

fastfile :

If it is AFTER the accrued bonuses, then I have no suggestions at this point since the year is closed.

fastfile :

If you asked me two weeks ago, I could have had some ideas, including retirement plans.

fastfile :

But the gate is closed for 2012

Customer:

What kind of retirement plans so I'll know. That's what I thought. Any pmts. to partners cannot be accrued right?

fastfile :

For retirement plans, you would have had to establish a plan before year end.

Customer:

You mean with an institution?

fastfile :

If you have employees, you cannot set up a retirement plan that excludes non-owner employees.

fastfile :

You can consider 401K or other plans

fastfile :

An SEP is possible as long as you don't mind contirbuting to employee's retirement.

fastfile :

In any case, tax planning is pro-active, not reactive.

R. Klein, EA, Accountant
Category: Finance
Satisfied Customers: 2882
Experience: Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
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