The S-corp can retain earnings instead of making the full shareholder distribution, but the shareholders are still on the hook for taxes even if they didn't actually receive the income. Generally, you want to run things so that paying the shareholder distributions doesn't create cash flow problems.
How to Distribute Net Profits Before Year's End for an S Corp
"The Problem With Retained Earnings
As previously discussed, an S corp. is a pass-through business, in which the firm pays no taxes. Instead, the firm's owners, or shareholders, pay all taxes as well as penalties.
"Keep in mind that the previous year’s closing balance in the retained earnings account is used as the opening balance the following year," says Upcounsel. Holding retained earnings past the year's end and into the next year can generate such problems as:
The very reason for the existence of an S corp., per IRS rules, is that its shareholders pay all taxes, penalties, etc. This means that the S corp. shareholders should generally receive all earnings before year's end.
- Shareholders are taxed on a percentage of the profits, whether or not they end up receiving the money thereafter.
- If the S corp. has a silent partner investor, this individual might not be happy with paying taxes on profits that she may not actually receive, particularly if she doesn’t have authority over how the earnings will be handled after taxes are paid.
Sincerely thank you. That helps out. How nuts right?
So let me ask you, a company like Apple, that has like 80 billion in the bank, what structure are they using?