S-Corp dividends

[Jude]

I think I know the answer to this, but I thought I'd check with some of you smart folks. I set up an S-Corp for my business at the beginning of the year (just before MMM posted his recent blog touching on that very same topic). I pay myself a salary. After expenses and salary I expect to have about $50,000 left in profit. My understanding is that this becomes dividends/distributions to the owner (that would be me).

My question is this: Is there any way to keep that $50k "in" the business, until it makes more sense from a tax perspective to distribute it to myself? I think the answer is 'no' because an S-Corp is a "pass through" entity, so the business's money is equivalent to my money and has to be declared for the year it was earned. Is this correct?

Otherwise, I might like to somehow invest it as a business, not pay taxes until I am retired, and then take the dividends at a lower tax rate. Is this wishful thinking? Is this something only C-Corps can do? Thank you for any thoughts!

[Midwest]

You pay the taxes on S-corp income (on your personal return) whether you remove the $50k or leave it in the business. 

If you leave the $50k in, it creates basis which you can take out tax free later.

If you don't want to pay taxes on the S-Corp income and have no immediate need for it, consider a retirement plan (especially if you have no employees).

[Jude]

You pay the taxes on S-corp income (on your personal return) whether you remove the $50k or leave it in the business. 

If you leave the $50k in, it creates basis which you can take out tax free later.

If you don't want to pay taxes on the S-Corp income and have no immediate need for it, consider a retirement plan (especially if you have no employees).

Thanks for the response.

I'm maxing out my Solo 401k employee contribution and putting a lot in as an employer,  but I will still have some left over.

To clarify, are you saying that that the income left over after expenses, salaries, and retirement plans (let's say for 2016) has to be taxed on my 2016 return? Or can I defer it and be taxed later (e.g., 2021, when I retire and my tax rate is lower)?

[Midwest]

You pay the taxes on S-corp income (on your personal return) whether you remove the $50k or leave it in the business. 

If you leave the $50k in, it creates basis which you can take out tax free later.

If you don't want to pay taxes on the S-Corp income and have no immediate need for it, consider a retirement plan (especially if you have no employees).

Thanks for the response.

I'm maxing out my Solo 401k employee contribution and putting a lot in as an employer,  but I will still have some left over.

To clarify, are you saying that that the income left over after expenses, salaries, and retirement plans (let's say for 2016) has to be taxed on my 2016 return? Or can I defer it and be taxed later (e.g., 2021, when I retire and my tax rate is lower)?

2016 net income (revenue - expenses) is taxed on your 2016 return.

[dandarc]

An S-Corp is a pass-through entity.  So it is as if you earned that money yourself, regardless of what you do with it. 

Think of the dividend as interest from a bank account - subject to income tax, and you're taxed on it the year you earned it, even if you leave it in the account.

Since you have a SoloK, I'd revisit whether an S-Corp actually saves you money - depending on where you are on the income scale, the limit that taking income as a dividend from the S-Corp rather than W-2 income places on your SoloK employer contribution can offset the self-employment tax savings.

[Jude]

An S-Corp is a pass-through entity.  So it is as if you earned that money yourself, regardless of what you do with it. 

Think of the dividend as interest from a bank account - subject to income tax, and you're taxed on it the year you earned it, even if you leave it in the account.

Since you have a SoloK, I'd revisit whether an S-Corp actually saves you money - depending on where you are on the income scale, the limit that taking income as a dividend from the S-Corp rather than W-2 income places on your SoloK employer contribution can offset the self-employment tax savings.

Thanks, that tells me what I suspected but hoped was not the case.

Regarding the SoloK, you are right, it is a close call in terms of whether it works out. The business situation is a bit more complicated than I depicted here (simplified for clarity), but I should sit down and double check whether it ends up saving money on SE tax to file as an S-Corp, and how much less I can put into my 401k as an employer. A lot depends on my income this year, which is hard to predict.