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How does a calendar year accounting period force S corps to pay more tax? |
In "Cashflow Quadrant" by R. Kyosaki, he states that by forcing S corporations to have a calendar year end, "...this again forced all income to be taxed at the highest rate." How does a calendar year-end result in more taxation than, say, a fiscal year that ends in, say, June? Individuals report their taxable income based on the January 1 to December 31 calendar year. S corporations are required to also use the calendar fiscal year. S-Corp income flows directly into an individuals tax return, allowing no opportunity to shift income between years. C corporations, however, can end their fiscal year at the end of any month. How this saves on taxes is pretty straight forward. Toward the end of your personal fiscal year (12/31), you bleed off some of your taxable income to your C corp by paying it for something like rent or marketing services. In January, your corporation can pay it back to you. Near the end of the corp's fiscal year, bleed its net profits out by paying yourself. This back and forth income shifting can go on for a long time. Sometimes income is never taxed; or if it is, we make sure that it is taxed at the lowest rate possible (15%). This is just a guess at what is meant by forcing income to be taxed at the highest rate. For the most part S-Corps do not pay their own taxes. The income is passed through to the shareholders. The shareholders may also be employees of the corporation and will receive a W-2 for wages. If the shareholder and the corporation have calender years the individual will receive a W-2 and a K-1 at the same time. For my example the W-2 shows taxable wages of $20,000 and the K-1 shows ordinary income of $10,000. This means on your tax return you are showing taxable income of $30,000. That could place the shareholder into a higher bracket. If the tax year ends on June the W-2 and the K-1 will be received in two different tax years for the individual. The W-2 for $20,000 will be taxed in 2006 and the $10,000 K-1 will be taxed in 2007. Stretching taxable income over a longer period of time can keep the income from drifting the shareholder into a higher tax bracket. This is different from a C-Corp in the fact the corporation is taxed at its own rate regardless when received and the shareholder/employee is taxed on the W-2 at normal tax rates and on any dividends distributed at the highest rate of 15%. On page 5 of the Form 1120-S instructions have 5 exceptions to the calender year rule. Form 1120-S instructions His catchall phrase is definitely incorrect. Whether an S-Corporation files on a calendar year basis or a fiscal year basis has no relevance as to the taxes it pays - first off, S-Corporations pay no tax (except for a built-in gains tax, which is too complicated to explain). What R. Kyosaki is really attempting to convey is "cyclical reporting" - business cycles - lets consider a business having four (4) cycles during a year (every three months). Lets say in September, which falls during the third quarter of a calendar year, the majority of income is collected by that business. That business might consider filing for a fiscal year ending August 31st; thereby deferring or delaying the payment of tax. You should know that the shareholders are the ones who pay a tax, not the corporation, in general. The income or loss of an S-Corporation is distributed to the shareholders based on a profit & loss percentage determined at the start of the business. Some shareholders might be on a fiscal year basis, yes, quite truly - some individuals like farmers for instance, can report their income on a fiscal year basis - therefore deferring income from year to year; unlike most of us that file on a calendar year basis. I doubt his "Cashflow Quadrant" was a bestselling book. I definitely wont ever consider buying it. |
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