How should I pay myself dividends from my S Corp when the income from that income is project based?
In other words, it is very uncertain in timing (like a consultant). I might be flush with cash one month and make nothing the next.
In this audio snippet, you'll hear about:
- Cash is king – make sure the business has enough cash to operate
- From tax side, it does not make a difference
Audio Transcript
Travis:
How should I pay myself
dividends from my S–Corp when the income from that entity is project
based? In other words, it's very uncertain in timing. I might be
flushed with cash one month and not make anything the next month.
Yosef:
Is this a question purely from the taxation side or from just general business administration?
Travis:
Both. Let's cover both.
Yosef:
From a general business administrative side, you don't want to deprive
your business of the cash that it needs to run. When I was getting my
MBA, the most important phrase we learned was "cash is king".
Travis:
Cash is king.
Yosef:
If you don't have cash, you aren't going to swim. Your business needs enough cash.
Travis:
Right. I recently heard from a businessman that I highly respect. He
said, "Most businesses don't go out of business because they don't have
enough money, they just don't have enough cash flow to make it
through."
Yosef:
Right. What separates the men from the boys are a second sense savvy
business people forecast where their sales are going to be and what
their expenses are going to be and ensure that they have enough cash to
make everything happen.
Travis:
Mm–hmm.
Yosef:
So if there is, in fact, a surplus of cash, a responsible business
person would not take the money out of the business without considering
short–term and long–term business cash obligations.
Travis:
Excellent answer.
Yosef:
Now on the tax side, it's really not going to make a difference,
interestingly enough. Because at the end of the year if your business
made money you'll pay tax, whether you took cash out or not. If your
business does not make money you're still not going to pay tax.
Travis:
So in the case of an S–Corp the disbursements to all of the members must be equal correct?
Yosef:
In proportion to their percentage ownership in the company.
Travis:
OK. That makes sense. So if for some reason there is a lot of cash in
one month, and the owners get big disbursements, and then they don't
get any disbursements in the next month, then that is not an issue from
a tax perspective.
Yosef:
That's correct.
Travis:
OK, great. Can anyone invest in an S–Corp?
Yosef:
Actually, Travis, let me clarify that for one second. There is an
impact for taxation, but it is not an income tax or a tax on income,
per se. This comes back to an issue that we discussed in a previous
discussion about basis calculations when you want to buy and sell a
business. Distributions that an S–Corporation shareholder takes will
reduce his basis in the interest he has in the corporation, and that
will have an impact on any capital gains tax that he pays when he in
fact sells his corporation or his share in a corporation later on.
Travis:
OK.
Yosef:
So, pretty much, a distribution issue. It's not going to be an issue
for periodic income tax purposes, but it will be an issue in the larger
capital gains game.
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