Tax reduction focus should never be once a year. But throughout the year.

And…Draws are NOT tax deductible! Did you know that draws reduce cash in the bank accounts but  are NOT a tax deduction? Draws are not deductible salary?

I frequently find that dentists, doctors, lawyers and restaurateurs do not understand the importance of taking payroll and paying in tax withholdings during the year INSTEAD of waiting until the tax returns are due in the following year.

Then if the money is not available to pay taxes, the dentist, medical doctor, lawyer and restaurateur go through major anxiety.   This doesn’t have to happen.

What happens when draws (also known as distributions paid in a S corporation) are paid instead of deductible expenses and deductible payroll?  Let  me give you an example:

If you had taxable income of $100K and $100K of cash  in your business and you paid draws of $76K, your cash account balance would be ONLY $24K, but your taxable income is STILL $100K.  You still would owe tax on $100K of taxable income!  BUT, you would ONLY have $24K of tax to reduce $100K of taxable income. This is like an ant beating up an elephant!  Or trying to jump to the moon.  It isn’t going to happen!

If the draws had been paid out as payroll and federal and state withholding had been taken out throughout the year, your income taxes would have been manageable!

I recommend strongly that in 2012, no monies be paid out as draws. All monies  must be taken in the form of payroll with the enough federal and state withholding taxes taken out.

Personal expenses should NEVER be paid out of your business account.  AFTER, you receive the funds into your personal account, you will use the money to pay mortgage payments and other personal bills. 

Your projected tax due or refund will be updated as we work on the quarterly financial statements: 

  • We will be giving you updated tax status after each quarterly financial statements.  Assuming your bookkeeper  prepares the bank reconciliations,  we will have time to update the tax status each quarter!
  • We will need to invest time in the final yearend tax plan but YOU  will be in the driver’s seat…in control because you paid taxes throughout the year instead of being stressed by not having the money.
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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