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For S-Corporation owners, some of the most important tax decisions of the year happen long before a tax return is prepared.
By fall, you have several months of financial results to evaluate, a much clearer picture of annual profitability, and—most importantly—time remaining to make decisions before the calendar year closes.
That makes September and the beginning of Q4 an important tax planning window.
For S-Corporation owners in Boise, Meridian, Eagle, and throughout the Treasure Valley, reviewing your tax position now can help identify potential issues with compensation, estimated payments, deductions, retirement contributions, and cash flow before your options become more limited.
Here are seven areas S-Corporation owners should consider reviewing before December.
One of the most important tax considerations for an S-Corporation owner is reasonable compensation.
If you are a shareholder who performs services for your corporation, simply taking all of the company's earnings as distributions rather than paying yourself wages can create problems.
The IRS generally requires shareholder-employees to receive reasonable compensation for services they provide before non-wage distributions are made to them.
But there isn't one salary amount that is automatically appropriate for every S-Corporation owner.
Reasonable compensation can depend on factors such as:
This is why choosing an arbitrary salary—or copying what another business owner pays themselves—is not a sound tax strategy.
As year-end approaches, review what you have actually paid yourself through payroll and whether it reasonably reflects your role in the business.
If your company's profitability or your responsibilities have changed substantially during the year, your compensation strategy may deserve another look before December.
Salary isn't the only owner-related transaction that deserves attention.
S-Corporation owners should also review distributions taken throughout the year and make sure they have been properly recorded.
It is common for closely held businesses to have money moving between the owner and the company throughout the year. Without accurate bookkeeping, it can become difficult to distinguish between:
These distinctions matter.
A payment being made from a business bank account does not automatically make it a deductible business expense, and a transfer to an owner should not automatically be treated as payroll or a distribution without considering what the transaction actually represents.
Cleaning up these accounts before year-end gives your CPA a much clearer picture of the business and can help prevent unnecessary complications during tax preparation.
For a deeper look at S-Corporation planning throughout the year, see our guide to Tax Planning Strategies for S-Corporation Owners in Idaho.
Your tax situation in September may look very different from what you expected in January.
Maybe revenue grew faster than anticipated.
Maybe the business landed a major new client.
Maybe expenses declined, margins improved, or you had an unusually strong summer.
Or perhaps the opposite happened.
Whatever the case, an S-Corporation owner's tax planning should be based on what is actually happening in the business—not assumptions made months earlier.
A year-end tax projection can use current financial information and expected Q4 activity to estimate where you may finish the year.
That can help answer questions such as:
As we discussed in How Business Owners Can Use Tax Projections to Make Better Financial Decisions, projections are useful because they give business owners time to respond to changing financial circumstances.
The goal is not simply to estimate a number.
The real value is identifying the number early enough that you can actually plan around it.
S-Corporation status does not eliminate an owner's tax obligations.
Because an S-Corporation is generally a pass-through entity for federal income tax purposes, business income and other tax items can flow through to the shareholder's individual tax return.
That can create a frustrating situation for owners who focus primarily on the cash they personally withdrew from the business.
Your tax liability is not necessarily based solely on how much money you transferred from the company into your personal bank account.
That is one reason estimated tax planning is so important.
If your business is having a much stronger year than expected, estimates calculated earlier in the year may no longer align with your projected tax position.
Reviewing your year-to-date income, previous estimated payments, payroll withholding, and projected remaining income can help determine whether your current payment strategy still makes sense.
This is especially important when business income has changed dramatically from the previous year.
Finding out in September gives you time to prepare.
Finding out when your return is being prepared gives you a bill.
As December approaches, business owners often become much more interested in deductions.
That's understandable—but deductions should be considered strategically.
Spending $10,000 simply because someone told you it would create a “write-off” does not mean you saved $10,000 in taxes.
You still spent the money.
Instead, year-end planning should consider expenses and investments that make sense for the business first and then evaluate the tax treatment of those decisions.
If you already expect to purchase items such as:
the timing of those purchases may be worth discussing with your CPA.
Depending on the type of asset, its business use, when it is placed in service, and applicable tax rules, there may be different options for recovering the cost through depreciation or available deductions.
The same principle applies to ordinary business expenses.
Make sure legitimate expenses are properly recorded, receipts and documentation are available, and personal expenses are not being mixed into the company's books.
Good tax planning isn't about manufacturing expenses.
It's about making sure the business receives the appropriate tax treatment for legitimate decisions it was already making.
Retirement planning can be particularly important for profitable S-Corporation owners.
Depending on your circumstances and the retirement plan available through your business, contributions may play a role in both your long-term financial planning and your current tax strategy.
Possible business retirement arrangements can include:
However, the rules surrounding contributions, employee eligibility, compensation, plan establishment, and deadlines can vary significantly.
For S-Corporation owners, compensation can also affect certain retirement contribution calculations.
That is another reason salary decisions should not be made in isolation.
If retirement contributions are going to be part of your year-end strategy, discuss them early enough to understand what deadlines apply and coordinate with your financial advisor, plan administrator, payroll provider, and CPA when appropriate.
Waiting until the final days of December can unnecessarily limit your options.
A profitable business can still experience cash flow problems.
That becomes particularly important when tax obligations enter the picture.
Imagine an S-Corporation finishes the year with significantly more profit than expected, but much of the company's cash has already been reinvested into inventory, equipment, payroll, debt payments, or other business needs.
The owner may still need cash available to satisfy the personal tax liability associated with pass-through income.
That is why tax planning and business cash flow planning should work together.
Before the end of the year, consider:
If you expect an unusually strong finish to the year, the tax consequences should be considered as part of your broader financial planning.
Our Business Advisory services help business owners look beyond tax preparation alone and evaluate financial decisions within the larger picture of their business.
There is an important difference between preparing an S-Corporation tax return and planning for one.
Tax preparation primarily documents what already happened.
Tax planning asks what is happening now, what is likely to happen next, and whether there are decisions that should be evaluated before the year closes.
Once December 31 passes, many facts about the year are already established.
That doesn't mean there are no planning opportunities after year-end, but it does mean certain decisions become harder—or impossible—to change retroactively.
This is why we encourage S-Corporation owners to meet with their CPA before tax season when their circumstances warrant proactive planning.
September and Q4 provide an opportunity to evaluate the business while there is still time remaining on the calendar.
Electing S-Corporation status is not a complete tax strategy by itself.
The potential value of an S-Corporation depends in part on how the business is operated throughout the year.
And the decisions you make before December can affect the information that eventually appears on your tax return.
For profitable business owners, proactive planning can help connect all of those pieces.
Rather than asking, “What do I owe?” after the year is over, strategic tax planning allows you to ask a much more useful question earlier:
“Based on where we're headed, what should we be considering now?”
If your S-Corporation has grown, profitability has changed, or you're unsure whether your compensation, estimated payments, and year-end strategy still make sense, now is the time to review your position.
LeBeau & Associates, CPAs works with business owners throughout Boise, Meridian, Eagle, and the Treasure Valley who want a more proactive approach to taxes and business planning.
Schedule a Strategic Tax Planning Consultation to review your current position and begin preparing for year-end.
Call LeBeau & Associates, CPAs at (208) 898-9900 to learn more about strategic tax planning for your S-Corporation.
