CPA, Accountant Offering Tax Services in Phoenix and Scottsdale, AZ

HOW TO REDUCE YOUR TAXES FROM YOUR BUSINESS.

 

By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

 

THE ADVANTAGE OF SELECTING A C CORPORATION AND AVOIDING HAVING TO USE A DECEMBER 31YEAR END.

 

By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

 

My guess is that nearly 100% of all small to medium sized businesses are on a calendar year ending December 31st.

Most S Corporations that file form 1120S and partnerships that file form 1065, are required to file on a calendar year ending December 31st.  In some rare cases they can have a year end of September 30, October 31 or November 30th. Since these are rare cases, we will assume for this book that ALL businesses file a calendar year December 31st year end.

Companies that grow rapidly and are very profitable and who want to raise capital commonly convert to what is called  a “C” or regular corporation. These C corporations have been around for hundreds of years.

The C corporation can have any year-end.

It does not have to have the normal December 31st year end.    Unlike the “S” corporation which was created in 1958 and the partnership, the C corporation pays its own tax.  The C corporation gets a special low tax on the first $50,000 of only 15% but unfortunately if the C corporation is sold and there is a gain, the gain is taxed twice, once at the C corporation level and then again at the personal level through dividends.  When I started my own CPA practice in 1985, C corporations were much more popular because health insurance premiums were not tax deductible for partnerships and S corporations. However within 10 years, health insurance premiums were  100% deductible for the S corporation and the partnership and the C corporation overall true tax was higher than for owners of S corporations and partnerships.

Although the Democrats and Republicans have agreed that the C corporation tax rate should be much lower and they are close on agreeing on a lower rate, no change will occur in C corporation rates unless the government can find ways to pay for the tax rate cut. In the meantime, many American companies have headquarters outside of the U.S. due to the lower tax corporation tax rates in those countries.

If your business is a C corporation, your goal will be to reduce the taxable income below $75,000 so that the corporate tax will be paid at rates lower than individual tax rates.

The best year end for a C corporation is June 30th.  However, if you have a big loss in one or two months in a row, you would want to use the month end with the least amount of taxable income.

 

The way you are going to decide what year end to have will be when accounts receivables are low and accounts payable are at the highest.  If that isn’t June 30th then you will need to look for another year end. The beauty of having a year-end that occurs after December 31st  is when the new C corporation owns 100% of an LLC partnership known as a Limited Liability Company and not a Limited Liability Corporation, the LLC no longer is required to file a return. Instead its activity is included in the C Corporation’s June 30th fiscal year end.  Why? Because when a partnership LLC with at least two members is taken over by a one member such as a C Corporation, the LLC becomes what is called a “disregarded entity” meaning it does not file a return. So the final filing for the LLC partnership would be within 3.5 months of the close out date of June 30th.

 

The LLC activity would then be folded into the C Corporation from July 1st to June 30th of each year.  In effect, you would keep on deferring the second 6 months to each calendar year to June 30th of the following year.  In the final year of the corporation if it was closed out December 31st, three six month of periods would be picked up.

To avoid this problem, you would simply have to not close out on December 31st but in the next year. This is easy to do since you could keep your banking open beyond December 31st.  What I find so exciting about taxes is there are a myriad of ways to use legal strategy to save income taxes!

 

Assuming you are on an Accrual Basis that recognizes income when earned and expenses in the month they take place, you will be fine to have an earlier yea-rend like 2-28 but the problem is that you have the books caught up so you will know what your taxable income is on an accrual basis.  June 30th may give you more time.

I have seen where CPAs who are trying to earn more income from clients continue to file partnership returns showing the required two partners. The problem is they are showing the same owner owning 50% each.  These CPAs might argue that it reduces IRS scrutiny but the truth is that besides costing the business owners more money in CPA fees it also causes more IRS scrutiny because there is another tax return that can be audited.

 

So remember that in this case where a C Corporation taking over 100% of  the ownership of  the LLC partnership, the LLC no longer will be a partnership but what is called a “disregarded entity”. No partnership returns should be or needs to be filed.

Another common mistake I have seen is when family members own 50% or more of a C Corporation, the family members are considered to be in control and therefore even though the corporation is on an Accrual Basis, family members cannot accrue the accrued bonus to family members to get the deduction for the year-end  but must pay the bonus and withhold taxes  BEFORE the year- end.

For example if a C Corporation has $100,000 of taxable income and wants to get the taxable income down to the 15% tax bracket for taxable income of $50,000 or more, the bonus to family members must be paid and cashed by the year-end. Accruing a bonus and paying after the year-end will be disallowed if IRS should audit.

So, when you decide on a year end for a C corporation, here is the key question.  Will you be able to have accurate financial statements completed in enough time to work on reducing your tax situation?   June 30th gives you more time and helps your tax situation by allowing you to only pay tax on the six months of taxable income instead of one year.
Another consideration is that if June is the slowest month where you no longer have to work 50 hours a week, you will want to start July 1 because June will give you more time to work with your CPA tax planner on reducing income taxes.

If you want a June 30th year end and you incorporate your year end on June 23rd, you have to pay for an additional tax return from June 23rd to June 30th.  A business tax return can never be for more than 12 months. IF you wanted to file from June 23rd to the following year’s June 30th you could not do that because it is more than 12 months. Therefore, you would want to incorporate in July so you could have a C corporation with the allowed 12 months or less ending on June 30th.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com