How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lane Your Own Question
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10142
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
1929974
Type Your Tax Question Here...
Lane is online now
A new question is answered every 9 seconds

I have an s-corporation and we receive the bulk of our

Customer Question

Hello, I have an s-corporation and we receive the bulk of our revenue between May and October, but our fiscal year is Jan - Dec. So at year end I show tons of retained earnings that I need to save to cover payroll and expenses from January to May. But I get taxed on those whether I spend them or not. Would it make sense for me to request a Fiscal Year reporting change? Or is there a way to earmark money for upcoming payroll without it going to retained earnings?
Submitted: 5 months ago.
Category: Tax
Expert:  Lane replied 5 months ago.

Hi,

...

Retained earnings is only booked at the end of the year - technically an S-Corp doesn't really have retained earings ... becasue the earnings are taxed whether physically distributed or not. - a VERY (commonely misused term by bookeepers) less so by CPA's, and in my experience, never by Tax Attorneys

...

For C-Corps, one of the most important decision at year end, after the corporation has paid it's taxes (corporate taxes at corporate rates - something S-Corps don't have to deal pay) is whether (1) to pay out dividends to shareholders (which will be taxed to the sharlders on a 1099-Div - the double taxation one hears about with C-Corps) OR (2) to book those profits to retained earnings.

...

Quickbooks and many other programs don't really make this distinction and let you use retained earnings to mean simply profits that (although already taxed to the individual - and not taxed to the S-COrp at all -in the year earned) are not PHYSICALLY distributed - a NON taxable event for the S-Corp, becsue the profits flow through to the s_corp shareholder employess either through salary or K-1 anbd are taxed in the year earned.

...

Sorry for the "data-dump," but important as a foundation to having ANY discussion about S-Corps, without just "going all over the place," eventually to get to a mutual understanding of this underlying dynamic/structure.

...

Now, In terms of the seasonality question ... if you think about the fact that for an S-Corp everything happens in a year (whether it be calendar year OR fiscal year).

...

Revenue comes in and expenses go out to arrive at that taxable profit, (which again flows to the owner).

...

Lets say that you stay on a calendar year; If you receive the bulk of your revenue in May through October, you'll still be deducting the expenses for payroll in January to May for that same year against that revenue, on that year's 1120-S.

...

Even if you change to, say, a may to may fiscal year, the revenue for that year (may through october) is still reduced by the payroll expenses for that year full year - including the payroll for jan through may.

...

From a tax standpoint, there's no real difference.

...

And looking at it as a year to year issue, it's also the same ... what you can't deduct in one year, you'll get to deduct the next.

...

What's more likely goin on here is a cash flow issue... your cash flow planning needs to be sure that you DON'T distribute that profit that was earned from May to october, becasue you'll have that payroll expense next Jan to May.

...

Now, changing to a fiscal year DOES help to more properly illustrate what accountants call the "matching principal," matching income with expenses for the same reporting period.... and would likely help with any any analysis for management purposes.... especially if you produce monthly, or quarterly statements.

...

But from a purely tax persopective, nothing change at all if this seasonal phenomenon happens year after year. It always "washes out."

...

So, again, sorry for the long answer, but the decision to change should be based on your objectives ... if it's to save money on taxes, there;s no reason to go through the change, the administrative overhead, the dificulty of matching fiscal year k-1's with calendar year 1040's, etc.

...

But if the objective is to match revenue with expense on a more frequent reporting period (not a tax issue) such as monthly or quarterly, then the change might make some sense.

Expert:  Lane replied 5 months ago.

By the way, here are the regs on this (as you can tell, IRS really prefers the calendar year - they expect a reasonable business purpose (such as the matching principal for GAAP reporting and analysis purposes) before allowing a change

...

"

All S corporations, regardless of when they became an S corporation, must use a permitted tax year.

A permitted tax year is any of the following:

  • A Calendar year
  • A tax year elected under section 444
  • A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444.
  • Any other tax year for which the corporation establishes a business purpose.
Expert:  Lane replied 5 months ago.

I hope this helps to let you make an informed decision ... Just remember that by Dec 31st (which is what matters for the TAX return) both the payroll expenses - for the entire year, INCLUDING Jan through May, AND the revenue earned in May through october ... come together to generate your taxable profit,

...

and the same thing happens for any other fiscal year ... revenue for the ENTIRE year and expenses for that ENTIRE year come together to genereate that year's taxable profit

Expert:  Lane replied 5 months ago.

Please let me know if you have any questions at all.

...

If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

JustAnswer will not credit me for the work unless you do.

...

Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

Customer: replied 5 months ago.
Hi Lane, I guess my question is, how can I reduce what I'm taxed on at the end of the year? Because I can't pay myself more because I need to save that money for payroll expenses during the lean months.
Expert:  Lane replied 5 months ago.

I wish there were an easy answer to that ... being sure to take everything that's coming to you (being sure to deduct the expenses themselves, finding additional deductions, making sure you're taking the deprecialtion deductions on your equipment, vehical expenses - either actual cost, which includes depreciation, or standard mileage rate - etc.)

...

If you have a NEED for equipment or will be buying it anyway, the Section 179 expense is likely the biggest expense deduction out there for businesses.

...

Normally when you buy a piece of equipment you nget to expense that cost over it's useful life through the depreciation expense.

...

Under IRC §179, you get to expense the ENTIRE cost of the equipment for the tax year you place it in service.

...

New truck, other equipment, essentiall any equipment.

...

you can read more about that here: http://www.section179.org/