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I have a small LLC that files as a C corporation.

The company has had a good year and will have around $100k in the bank in December after paying all expenses and salaries for this year.

However, a big, profitable project has finished without anything similar in the pipeline, so next year will be lean; I also expect to have a lot of new software product development expenses (R&D). Instead of paying that surplus to myself as a bonus and thus paying personal taxes on it, I would like to "save" the money in the company for next year's expenses, where it will be used up. But if I leave it in the bank at year-end, it will be subject to the massive corporate income tax rate of 30-40%.

The accountant says I have to pay that money to myself, pay the personal taxes, and then put the remaining money right back into the company next year.

Is there no way for a small business to save money for known future expenses?

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    Are you sure you don't want to listen to your accountant? If they're any good, they will have thought of the basic options, and looked at your situation to determine the best tax outcome. For example - if you have a minimal salary from the business, then taking additional salary may have low personal tax owed by you, and then you could loan the money back to the business, taking it out when the business has sufficient cashflow. What exactly did your accountant say? A second opinion is nice, but your accountant is to some degree liable for their advice, so I wouldn't discard it too hastily. – Grade 'Eh' Bacon Aug 2 '17 at 12:33
  • How are you calculating the "massive corporate income tax rate of 30-40%"? By my calculations tax on $100K in profit for a C Corp would be $22,250. – TTT Aug 2 '17 at 13:57
  • @Grade'Eh'Bacon I'm just asking for a second opinion. I trust my accountant and have always followed her advice, although sometimes, like now, I do some legwork myself. I took a decent salary from the business and paying myself that bonus this year when I will need it to run the business next year seems like a waste. In personal life we are allowed to save for lean times, it is even considered a virtue. It just seems strange that businesses are not allowed to, especially small shops which have a lot of fluctuation. – Wellington Turntop Aug 5 '17 at 18:22
  • @TTT I looked up some tax tables. Let's just go with your number, I'd still hate to pay $22k in taxes given that I will need all that money next year. – Wellington Turntop Aug 5 '17 at 18:24
  • @WellingtonTurntop - regarding your comment "In personal life we are allowed to save for lean times...it seems strange that businesses are not allowed to" - note that the personal savings you refer to would be with after-tax money. It's not as if businesses have some sort of "extra" tax that individuals don't have. (Except perhaps dividends paid by a C-Corp which actually are double taxed.) – TTT Aug 6 '17 at 2:24
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As was once famously said,

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

— Benjamin Franklin, 1789

It's very likely that either the company or you personally is going to have to pay taxes on that money. Really the only way to avoid it would be if the company spent that money on next year's expenses, and paid the bill before the end of this year. Of course you can only do that if the recipient is willing to receive their money so far in advance, which isn't necessarily the case since they would pay more taxes this year as a result.

As for whether it's better to have the company pay the tax or for you to do as your accountant suggests, there are a lot of factors that go into that equation, and my gut feeling is that your accountant already ran it both ways and is suggesting the better choice.

  • Btw, Ben Franklin isn't the originator of the "death and taxes" portion of that quote, even though it is often incorrectly attributed to him. More info here: en.wikipedia.org/wiki/Death_and_taxes_(idiom) – TTT Aug 5 '17 at 21:10
  • My accountant also suggested prepayment to certain vendors. I will explore that. Thank you. – Wellington Turntop Aug 7 '17 at 3:51

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