We are a small C corp with sales less then 4 million I have 2 questions

1. Are we able to use the "CASH" method for accounting for our corporate taxes

2. It has been advised to us to begin to set up a retained earnings account and deposit 5% of sales to this account for emergencys and small oppurtuities for future expansion.

Will we have to pay corporate taxes on this account or does the IRS allow us to keep a certain amount in the bank

We have not paid any dividends to date

Bob

To answer your first question, "you can elect to have the cash method of accounting assuming your are not in the retail business." As a matter of fact, most small businesses, with annual sales of less than $5 million, generally are free to choose which accounting method to adopt.

But if your business maintains an inventory of items that you will sell to the public, the IRS requires that you use the accrual method of accounting. (Inventory includes any merchandise intended for sale to customers.)

To answer your second question, the IRS would generally not have a problem of small corporations maintaining retained earnings. As such, Retained Earnings are "undistributed profits" that have already been taxed by your corporation at the applicable corporate tax rate, but have not been distributed to shareholders in the form of Dividends. Usually, the IRS would not have any problems with corporations maintaining Retained Earnings assuming there is a valid business purpose for maintaining these reserves.

Actually, it is fairly prudent to maintain some profits with your company as buffer for the unexpected expenses and an economic downturn.

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