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evanevans
Level 2

If I Re-invest S Corp income do I need to pay taxes on it?

If I invest the income/revenue of my S Corp into:

  • cash flow real estate rental properties,
  • crypto mining equipment,
  • the stock market,
  • art,
  • lending,
  • leased equipment

do I need to pay taxes on the income/revenue since it'll have been re-invested?

8 Replies
tagteam
Level 15

If I Re-invest S Corp income do I need to pay taxes on it?


@evanevans wrote:

do I need to pay taxes on the income/revenue since it'll have been re-invested?


Yes. You need to report, on your individual income tax return, the income/revenue (and all other amounts) listed on the K-1 you receive from your S corporation.

 

Exactly what you do with any funds distributed is irrelevant and would not reduce the income you receive (or constructively received) from your S corporation.

evanevans
Level 2

If I Re-invest S Corp income do I need to pay taxes on it?

Thank you, but I must not have explained well initially. I suppose, upon further research, I'm referring to would become "retained earnings" not distributed in a tax year. Can that money be invested into cash flow assets (which include liabilities that produce income, ie: a mortgage on a rental income property) before the end of the tax year to zero out of the profit's that would have otherwise been retained?

Critter-3
Level 15

If I Re-invest S Corp income do I need to pay taxes on it?

You are not reading the correct rules for an S-Corp since they don't technically  have "retained earnings" for income taxes.   They are a pass thru entity and as such  all profits are passed thru to the owners and are taxed in the year they are earned EVEN IF  the company doesn't distribute the earnings and they "retain" them in the company account.    

 

ALSO  if the owners work the business then they MUST take a payroll and get issued a W-2 at the end of the year along with the K-1 form.   If none of this makes sense then you need to educate yourself on how an S-Corp works and the owners responsibilities.  Seek local professional assistance if needed so you are in compliance with state and federal rules.  

Critter-3
Level 15

If I Re-invest S Corp income do I need to pay taxes on it?

FYI ... retained earnings is a bookkeeping situation and not an income tax situation for S-Corps.  

tagteam
Level 15

If I Re-invest S Corp income do I need to pay taxes on it?


@evanevans wrote:

.....I'm referring to would become "retained earnings" not distributed in a tax year. 


@Critter-3 already mentioned this, or at least it should be implied, but net profit from your corporation is passed through to the S corporation shareholders whether it is distributed or not.

 

The corporation can certainly invest net profits retained (RE) as it sees fit but those net profits will still flow through to the shareholders, regardless.

evanevans
Level 2

If I Re-invest S Corp income do I need to pay taxes on it?

Okay, so is the benefit of S Corp for an individual than, that once you determine W-2 the rest of earnings are passed through as dividend (100% shareholder) income? Is that the main purpose of going S Corp for an individual for tax benefit?

Critter-3
Level 15

If I Re-invest S Corp income do I need to pay taxes on it?

An S-Corp doesn't pay "dividends" per se only C-Corps pay traditional dividends reported on a 1099-DIV and entered as dividends on the tax return.   All profits on the S-Corp are passed thru to the owners on a K-1 form to be taxes on the Sch E page 2. 

 

As far as to a discussion on the pros and cons to having an S-corp ... this should have been considered before opening the corp and seeking local professional guidance would be wise to see if you really want or need to keep it open.   Education is key.

 

https://www.google.com/search?q=pros+and+cons+of+s+corp+election&rlz=1C1SQJL_enUS880US880&oq=pros+an... 

 

 

tagteam
Level 15

If I Re-invest S Corp income do I need to pay taxes on it?


@evanevans wrote:

.....once you determine W-2 the rest of earnings are passed through as dividend (100% shareholder) income?


As @Critter-3 stated, you should seek professional guidance.

 

However, after you pay yourself a reasonable salary for your services to the corporation, any additional distributions would then be taxed at ordinary income tax rates but not subject to self-employment taxes. You need to be very careful here because this area is the subject of frequent review (and recharacterization) by the IRS.

 

 

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