Tax Guru – Ker$tetter Letter

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Income Shifting

Posted by taxguru on September 21, 2009

Q:

 Subject:  Tax issues-c corp

 Hi, thanks for the awesome website!  Lots of useful info.  However, I was wondering if you could clarify for me how the shifting of money between fiscal years works.  Why does it have to be at the end of the year?  How can I legitimately transfer funds to the corp and deduct them from my personal income?  Is the repayment in January and the paying of money from the corp in June or whenever two separate transactions?  Just trying to decide on the right business structure for the lowest amount of taxes on our precast concrete company.

thanks a lot!

 

A:

The income shifting is normally an ongoing process throughout the year based on what the businesses can afford.    However, it is also critical to have your professional tax advisor take a glance at how the net taxable income is looking about a month or so before the end of the entity’s tax year just in case there is a need to shift a lot more income than normal before year-end to get the income down to a reasonable tax bracket.

I have also been seeing some clients who have been shifting too much income during the year, creating a large negative taxable income; so that we need to make an adjustment in the opposite direction before the end of the tax year.

As I constantly warn. this kinds of strategy to shift income between entities is not overly complicated to do; but should not be attempted without the assistance of a professional tax advisor who understands the benefits of this.  Too many people simply look at their company’s bank balance as an indicator of their current level of net income; while an experienced tax pro knows that the actual taxable income figure will often be very different from the bank balance.

If your current professional tax advisor is one of those who believe that intentionally shifting income between entities is too much hassle to even think about doing, it’s time to switch to another tax pro who is not as lazy and is more concerned about helping you hold onto your money.

Good luck.

Kerry Kerstetter  

 

 

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