CPA Services Blog

How Should LLCs Handle Corporate Tax on Retained Earnings?

Reinvesting in your business is essential to helping it grow, but shareholders also expect a return on their investment in the organization. How businesses distribute profits among shareholders and assume tax responsibilities on retained earnings will depend on a number of factors, including the amount of retained earnings and your organization’s expenses. Because these factors can change over time, it’s best to work with a New York accountant who has experience with state and federal tax law.

LLCs as Pass-Through Entities

LLC Corporate TaxesAn LLC, or limited liability company, is a hybrid entity that has characteristics of a corporation and a partnership. According to the IRS, it can be treated as either kind of business for tax purposes, depending on whether you opt to file a Form 8832 and affirm your organization’s status as a corporation. Otherwise, an LLC is a pass-through entity, which means that profits and tax liability “passes through” the business to be distributed among owners and shareholders.

Sometimes it’s preferable to allow tax liability to pass through to individual returns; at other times, you may want to file corporate taxes. Where this distinction matters most is with retained earnings.

Retained Earnings and Taxation

Retained earnings are what you have left for reinvestment in the company after subtracting dividends from the LLC’s total net income. This retained surplus that isn’t distributed to partners and shareholders is subject to taxation. If your organization’s retained earnings reach a $250,000 threshold, any amount beyond this becomes subject to a supplemental corporation tax at 39.6 percent. For example, if your LLC ends the fiscal year with $400,000 in retained earnings, $150,000 of that amount is taxed at the supplemental corporate rate for a tax liability of $59,400.

Under normal circumstances, then, it is often best to limit retained earnings and let revenue pass through unless you are able to justify a significant reinvestment of profits. The IRS makes exceptions on supplemental tax liability when businesses demonstrate how they plan to use these retained earnings.

Justification of Retained Earnings

A business that plans to expand, upgrade equipment, or invest in restocking inventory can offer a business justification for using retained earnings and may be able to waive additional taxes. You will need to document how you plan to allocate retained earnings. Your CPA can offer guidance on how to gather and prepare the necessary proof, which might include meeting minutes, quotes for services, and other evidence that your LLC is preparing for growth.

Form 8832 and Corporate Taxes

Another way to manage retained earnings is to file a Form 8832 and affirm your choice to have corporate taxes assessed on your LLC. For companies that intend to invest retained earnings into the organization over a few years, this may be a fiscally sound choice, but because you must wait five years before returning to a pass-through taxation structure, you will want to go over all your options with your accountant.


When Should You Outsource?

Whether they own a small business, a mid-sized regional organization, or a multi-national corporation, business owners have a host of options when it comes to accounting services. For some companies, handling routine accounting in-house and relying on an outside accounting firm for attestation and assurance makes sense. For others, turning over all accounting duties, including payroll and tax preparation, to a CPA is the best option. Continue reading

How Will Tax Reform Affect You?

2017 Tax Reform Proposal

President Trump’s recently released one-page tax reform proposal, linked here from the Journal of Accountancy, suggests sweeping changes to current tax codes intended to “grow the economy and create millions of jobs.” From dramatic simplifications of income tax brackets to a possible repeal of the estate tax, these shifts could have major implications for you and your business.

While an overview of proposed changes can help clarify how proposed reforms may affect your personal and corporate tax responsibilities, it’s best to speak with an experienced accountant who is familiar with your specific goals. Working with a Long Island CPA with a thorough understanding of federal, state, and local tax law is vital to preserving your wealth and building capital for new growth. Continue reading

Is Your Online Business Ready for Tax Season?

NY Tax Season

Thanks to technology, telecommuting, and the internet, office life has been transformed. Remote staffers work from anywhere in the world, your workspace has expanded into the cloud, and contractors contribute their unique expertise to your organization. While many of these changes make business easier to conduct than ever, they present unique challenges during tax season. A New York CPA with thorough knowledge of state and federal law can help you manage the new complexity of your organization’s online activity. Continue reading

Should You Choose a Roth IRA or a Traditional IRA?

Whether retirement is decades away or a few years off, the changes you make to your investment plans can have a significant impact on your post-retirement lifestyle. One big question many investors have is about Roth IRAs and traditional IRAs. Specific state and local regulations can also affect your saving strategy, so choose a New York accountant with a thorough understanding of how state laws intersect with your investment strategy. It’s best to seek the input of a qualified financial adviser before making investment decisions, but this quick guide will give you useful suggestions to discuss with your CPA. Continue reading

What You Need to Know about Social Security Benefits for 2017

For the nearly 90 percent of Americans over the age of 65 who collect some or all of their retirement benefits through Social Security, 2017 could be a year of changes. For those who are planning to retire within the next five years, current changes to Social Security could have a lasting impact on their benefits too. While the best guide to maximizing your benefits and protecting your wealth is a knowledgeable CPA who can personalize your retirement planning, reading up can help you know which questions to ask when talking to your accountant or financial planner. Continue reading

The Biggest Tax Mistakes Businesses Make – And How You Can Avoid Them

The Biggest Tax Mistakes Businesses Make – And How You Can Avoid Them

The Biggest Tax Mistakes Businesses Make – And How You Can Avoid Them

Individual tax returns can become complicated enough, but businesses face even greater challenges. For an organization, a small mistake at tax time could spell significant fines and penalties down the line – costs that could limit your company’s growth for years to come. The good news is that most such mistakes are easily avoidable. Here are some of the most common tax mistakes and how to protect your company from making them.
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Take Charge of Your Company’s Year-End Taxes Today

Take Charge of Your Company’s Year-End Taxes Today

Take Charge of Your Company’s Year-End Taxes Today

When it comes to the little things, procrastination has its rewards. Sleeping in an extra few minutes or putting off errands until after your alma mater’s big game can feel good. When talking about your business’ 2017 taxes, though, it’s never too early to start. Every year brings new changes to tax laws, and organizations that prepare to implement next year’s tax strategy early gain a significant chance to make the most of what’s new. With the help of a New York accountant who has already done the necessary homework on local, state, and federal tax law for the coming year, you ensure your company benefits from every deduction and credit you’re owed. Continue reading

Retirement Planning at Any Age

How much do you need to save for retirement? What’s the safest plan for your retirement savings today, and will that change as you get closer to retiring? How can small changes now add up to meaningful retirement income in the future? People are right to ask these and other important questions about retirement. It’s easy to think about retirement savings as a future problem, but the solution happens now. Whether you’re founding a start-up, building a family, or building on a lifetime of career successes, this is the right time to think about your long-term financial security. Your CPA is your most valuable financial planning resource, and here are some points to discuss with your accountant. Continue reading

Estate Planning for Everyone

Estate Planning For Everyone

Estate Planning For Everyone

Federal estate tax laws have changed recently, reflecting shifts in how families pass along wealth. The current exemption threshold is indexed for annual inflation, and as of this year, that figure is $5.45 million. This higher threshold means that the great majority – more than 98 percent – of a New York CPA’s clients have estates that are exempt from the national gift and estate tax. Continue reading