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Old 11-26-2012, 01:10 PM
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Corporation retained earn zeroed out

Can the corporation pay out bonuses to officers (2 officers) to help zero profits for the year, but the officers loan the corporation back the money, so it doesn't effect the cash flow for the corporation? Is there a way to reduce the profits w/o affecting cash. Currently, going to show a profit over $50,000 and want to reduce it with bonuses, but are tight on cash? Any other options? Suggestions?



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Old 11-26-2012, 08:37 PM
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“Can the corporation pay out bonuses to officers (2 officers) to help zero profits for the year, but the officers loan the corporation back the money, so it doesn't effect the cash flow for the corporation? “---->Correct. Many small to medium reg corporations “zero out” their earnings. Zeroing out means to claim salaries and bonuses, plus other deductions, that significantly reduce the annual profit (retained earnings) of the corporation. In case of the need for liquidity, the amounts taken as salary and bonus can be loaned back to the corporation. Such loans should be documented with corporate minutes and promissory notes with reasonable rates of interest, often the applicable federal rate. It is a good idea when forming an entity, or when doing long-range planning for potential profits, to document in the minutes resolutions for bonus plans for the officers of the corporation so that, if later, officers' compensation is attacked by the IRS as being too high, there is a documented basis for the deductions for bonuses, unless the bonuses are proportional to stock ownership. Another way of justifying accumulated earnings is to show through corporate minutes that there is a future need for such retained earnings; for example, building a new factory, introducing a new product line, or having a cash reserve for an expected business downturn. Unfortunately, corporate managers often do not become aware of a potential accumulated earnings tax liability until the issue is raised in an audit.The ability of the IRS to tax the corporation for accumulating too much retained earnings and, conversely, to attack the corporation for distributing too much in the form of deductible compensation, leads to the need for planning. For smaller companies. reported profits result in retained earnings, a type of equity. As years roll by, these accumulated after-tax earnings increase the retained earnings account, unless they are distributed. Retained earnings in a C corporation will eventually be taxed again, either as dividends, salary, bonuses or as liquidating dividends when the corporation is terminated. Of these four choices, the most favorable is a distribution of salary and bonuses, which are deductible as compensation at the corporate level, although they are subject to additional employment taxes. Dividends, as most know, are not deductible at the corporate level and are often frowned upon in smaller entities for their lack of deductibility.

“Is there a way to reduce the profits w/o affecting cash. Currently, going to show a profit over $50,000 and want to reduce it with bonuses, but are tight on cash?”-----> As described above, the amounts taken as salary and bonus can be loaned back to the corporation and do not affect cash situation.



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