Controlling Taxes Through Staggered Year-Ends

This is a great loophole C Corporations have that no other business entity does: the ability to select their own fiscal year-end. All of the other, tax flow-through structures are stuck with the same fiscal year-end you are, being December 31st.

The problem with all of your businesses closing their books on December 31st is that it doesn’t always give you enough time to plan, particularly where you’ve got multiple business streams of income that can either be inconsistent, or tend to pay off at different times. You could wind up either with a huge pile of money that artificially inflates your overall tax rate. Or, you could find that you’ve done all of your year-end billings and have a big tax bill for money that isn’t yet collected. Even worse, right at the exact time you may need your accountant or tax advisor’s undivided attention – such as how best to structure a windfall or shortfall – they are buried under OPTR (other people’s tax returns), and the answers you get are either late, incomplete or not properly thought through.

By having a C Corporation in your business mix you can often alleviate some of the pain through layering of structures. A C Corporation could be paid a management fee, or a commission of some sort, which would allow you to pull windfall money out of the S Corporation and off your personal tax bill. By selecting a different year-end date for the C Corporation – i.e., June 30th or August 31st (you can use a traditional calendar quarter or select a random month-end), you’ve got a safety valve for that money. It can stay in the C Corporation until the December 31st tax-time crunch has passed, and your CPA/Tax Strategist has the time they need to best help you to manage this income.

There is one important note that we must make here, though. You must have economic purpose for any side-streaming strategies. The IRS rules allow you to create a tax strategy as long as it first and foremost has an economic purpose. You can’t create a strategy that only saves you taxes.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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