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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15308
Experience:  15years with H & R Block. Divisional leader, Instructor
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I own a business and it is incorporated. Do I have to pay

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I own a business and it is incorporated. Do I have to pay taxes on the profit I do not use/spend/take out of the business account at the end of the year?

Robin D : Hello and thank you for using Just Answer,That depends on the actual business entity type. If this is an LLC or S corp then the earnings will pass to the members and be taxed even if not distributed. If it is a C corp the C corp pays tax on the earnings.
Robin D : So, what exactly is your business entity?
Customer: S corp
Robin D : Yes, the earnings of the S corp are passed and even if not distributed are taxable to the memebers of the S corp.
Robin D : S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.
Customer: What do I have to do to change this so that I am not paying tax on profit I do not use at the end of the year. Sorry, I am new to running a business
Robin D : You would not be able to not be taxed on the profits. Even if you changed to a C corp , it would pay tax on the profits earned itself.
Customer: Even if it is an Owner Equity account?
Robin D : The greater your profitability in your business, and the more of the income you retain, the greater your owner equity will become. If a business owner chooses to withdraw funds from the owner’s equity account, the value of the funds withdrawn will be taxed as capital gains.
Customer: Even if is an Owner Equity Account
Customer: So botXXXXX XXXXXne, a business will be taxed whether or whether not you do not use year end profits, no matter what status the business is currently in at the time, S corp, LLc, etc...
Robin D : The members (or shareholders) will pay tax on the profits. I am trying to think of a simplified way to word it.
Customer: Sole proprietor in this case however
Robin D : As it is a S corp the rules would not change for sole share holder.The initial tax basis of the owner's equity interest is equal to the initial cash plus the tax basis of non-cash property contributed to the entity. These draws are not taxable. When the s corp makes a profit, it is reported on the K-1 which is transferred to the shareholder's 1040. Taxes are paid on the 1040.
Robin D : When the shareholder takes a distribution, it is therefore not taxed again.
Robin D : You pay the tax on any amount of the profit. That is really too simplified but the tax is paid as earned. The entity defines who pays.
Customer: And with the LLC, it is a whole other ballgame, correct??
Robin D : Yes
Robin D : A sole LLC would be treated as a sole proprietor and use Schedule C
Robin D : All profits again are taxed and subject to Self Employment tax
Robin D : Of a sole LLC could request to be an S corp
Customer: Ok, thank you so much. This bit of information has helped answer one of many I have in starting my businesss
Robin D : Your positive rating is always thanks enough.
Robin D : I am glad if it helped you.
Customer: I will give you the highest one, thank you so much
Robin D : When you visit your question homepage, you’ll see a link to request me again. This link displays and works whether I am online or offline.
Customer: Ok, thankyou will do
Robin D : Best wishes
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