S-corp: Retained Earnings vs. Reserve Account

My family owns an S-Corp with seven employees. We have a sharp cash flow cycle due to a reimbursable lag in our industry. Because our ARs during the first of the year take
longer than normal to get paid, our cash income drops significantly from Jan-May, and then builds back during the rest of the year. On paper, we are profitable throughout the year. It is purely a cash issue. Because it is an S-Corp, and he will be taxed on retained earnings anyway, my father takes cash out of the company in December, only to personally loan it back to the company Jan-May. Is there a way to keep this cash in the company-perhaps in some sort of special reserve account-without it being classified as retained earnings? Obviously, if this is a possibility, the cash we would use in year 1 to establish that account would be retained earnings, and taxable as such. After that however, if we drew down that account and then rebuilt it to a set level each year, would that cash be considered retained earnings, or some type of operating asset/account of the company? Obviously, if we ever increased the amount to be maintained in that account, the delta of the increase would come from taxable retained earnings, but would the par level amount be taxed as retained earnings if it were carried over from the previous year? Many thanks, Eric
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S corporations don't have retained earnings, unless they were a C corp previously. Perhaps you need to consult with your CPA.
Distributions, loans etc are well beyond the scope of what can be discussed here. Cash flow & taxable income can vary greatly from each other. ___________________________________ <<< Benjamin Yazersky, CPA [NJ & NY] >>> -----> real address on hobokeni or hobokenx <-----
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When he talks about "retained earnings" I think he means net taxable income. The term "retained earnings" is a specific term of art and is not the same as taxable income. I suspect the answer to the specific question is no you can't shift S- corp earnings from one year to the next. Your father's taking out the money (or leaving it there, for that matter) should have no effect at all on his or anyone else's tax.

Excellent advice.
Stu
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Your question as stated shows a fundamental misunderstanding of S Corp accounting and taxation. Also, there are many factors not addressed in your question that have significant impact on the answer. You should waste no time in consulting with an experienced CPA. It will be money well spent. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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Eric wrote:

I thought we had dealt with this question pretty thoroughly over on misc.taxes, where it was first posted. As we said there, the whole concept of "taxable retained earnings" has no meaning in the income tax context (except for the accumulated earnings tax, which applies only to C corporations and is seldom imposed). It does occur to me, however, that if you are operating in a state that imposes its franchise tax (measured by net worth) on S corporations, as several do, then there might be some advantage to reducing the value of the capital accounts before year end. You'd have to look at the particular state's rules, however, to see whether a loan to a stockholder would be included in the franchise tax base. If it is, the stockholder loan would have no tax effect for franchise tax purposes either. Katie in San Diego
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