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WebCPA
WebCPA, Tax Accountant
Category: Tax
Satisfied Customers: 111
Experience:  Licensed CPA. 10+ years experience.
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May I leave money in my S corp at the end of the year to maintain

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May I leave money in my S corp at the end of the year to maintain operating capital, or must it all be obligated? Is there any legal way to not have to draw down money in that account as income if the account has significant funds in it at the end of the year?
Welcome and thank you for your question. I'll do my best to provide an informative answer. Please let me know if you need any clarification.

You can leave as much cash as you want in the company. The shareholder's tax liability, however, is not determined by the amount of cash taken out of the company. The net profit of the company will be reported on the shareholder's K-1 regardless of the amount of money withdrawn. To reduce your tax liability would require some tax planning such as purchasing fixed assets just before year-end that you can deduct via bonus depreciation.
I hope this helps and if you need further assistance please let me know.
Customer: replied 4 years ago.
In other words, I must obligate projected purchases of assets before the end of the year in order to reduce taxation of unobligated money in the account at the end of the year?
Basically, if the company is cash basis, spending the money before year-end will reduce taxable income. For an accrual basis company, the expenses must be incurred prior to year-end. It is important to keep in mind that the taxable income is not directly correlated to cash in the bank or cash withdrawn from the company. And there is no obligation to distribute the money out of the company. Further, a shareholder distribution does not create income (unless the distribution exceeds your basis in the company) and it is also not an expense.
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