If you have affiliated companies, such as an LLC that owns the real estate of your business, a holding company that acts as your management company or just other companies you control, you should obtain the same September financial statements for all of them and review them as a combined group.
If your companies share expenses, review the allocation of those expenses again to verify they are actually being charged to the correct company based upon the usage of each. If adjustments need to be made year to date, then make them now and change to the correct allocation for the final three months of the year rather than waiting and adjusting them at year-end. Compare the allocation to your final prior year-end balances. If you made adjustments at year-end last year, then compare the end of the year balance to the first nine months. Try to keep intercompany adjustments to a minimum at yearend. You will have a much clearer picture of where you are if you are more realistic throughout the year.
If you have a profit, what is the year-end projection based on the current economic conditions? If your profits will continue, then review what your estimated income tax may be. If you only have companies that are considered pass-thru entities for income tax purposes, such as S corporations, LLCs, LLPs or partnerships, then you may need to review whether you have enough withholding and/or estimated income taxes paid to put you on the safety basis.
Being on the safety basis for income tax purposes just means you should not incur any interest and penalties for underpayment of estimated income tax payments and/or withholding. It doesn’t mean you will not have additional tax due on April 15th. Any balance due is always due and payable on April 15th. There is no extension for payment of taxes; the extension is just to give you more time to file the return. It also doesn’t mean you could not have interest and penalties for failure to pay the estimated tax payments timely throughout the year.
If you have C corporations and pass-thru entities, you will need to review the tax effects of income in the C corporation versus the pass-thru entities. The corporate income tax rates rise to the approximate levels of individual income tax rates. The best situation is to maximize the lower tax brackets in the C corporation with just enough income to be at a lower effective rate than your personal tax brackets. You may or may not be able to achieve this based upon the operations of your various businesses.
The bad thing about leaving income in a C corporation versus pass-thru entities is if you ever wanted to take those accumulated profits from the C corporation, you would pay an additional income tax in the form of capital gain, dividend and/or ordinary income rates, depending on the type of profits or assets you took from the corporation.
If you have losses in one or more pass-thru companies, you need to review your income tax basis with your accountant. Just because you have a loss, you may not be able to offset the loss against other types of income you generated throughout the year. Each entity stands on its own. Some types of losses cannot be offset against certain types of income. The end of the year is not the time to find out you should not have sold or purchased certain assets or increased expenses you could have delayed until the next year. You may also want to accelerate some income into this year if you know you are in a loss position that you cannot utilize against other income.
If you took distributions or repaid loans to stockholders that were used as income tax basis in prior years, and you have losses this year, you may have generated income from those payments. Check with your accountant at the end of each year to determine what your tax basis is, going forward to the next year to make sure you don’t incur income from repayments of loans or distributions in the current year when you are generating losses.
If you have losses in a C corporation in the current year, you may still owe tax. This is possible due to the differences between book income and taxable income. Various expenses are deductible for your financial statements, but not deductible for income tax purposes. Some of these expenses are portions of your travel and entertainment which may be limited based on what type of expense it was, inventory write downs if you are on the LIFO method of valuing inventory, life insurance, depreciation method differences, etc.
You may also need to look at any reserves you have on your books. Reserves are generally not deductible for tax purposes. Your accountant may have already picked up part of your reserves as income in prior years as an M-1 item on your tax return, so only the increase over the prior year may be income. If the reserves decreased this year, you may have additional expense to record for the tax return.
All this may sound confusing, and it is. With the current tax law, it is sometimes very difficult to estimate your total taxes due until you have a very good idea of where you will end up at for all your companies and your personal income and expenses. Sometimes this is not possible until after it is too late to do anything about it. Proper advance planning can help minimize surprises but not eliminate them.
To complete proper tax planning, it is sometimes necessary to almost complete the return to see the effects of all the flow thru entities profits and losses with your personal items. This is well worth the effort if you know your tax due this year is in excess of the prior year and your total payments for the current year. It gives you time to figure out where the additional income tax payments due on April 15th can be generated from.
Don’t wait until the last minute. Let your accountant know now you want to schedule time to review your current tax situation early.
Vol 4, Issue 10