USA Showing a Loss with Money in the Bank?

[mikeruney]

Have a C-corp client and every year they clear the bank accounts down to 10k. In December they look at how much money is in the account and then either buy equipment or pay out bonuses to where all the accounts start with 10k. This typically reduces the Corporation's income to near zero on the tax return. Except this year.

In Nov they had nearly 1 million extra in the bank, but where already showing a -127k loss. But they took the money out, paid the bonuses and now have a -971k loss. I can't explain how this happened.

 

[BIG E]

Could there have been unbooked receivables at year end?

 

[kirby]

Consider preparing a statement of cash flow. It starts from net income and reconciles down to ending cash. Which is what you are trying to figure out.

 

[DrStrangeLove]

Have a C-corp client and every year they clear the bank accounts down to 10k. In December they look at how much money is in the account and then either buy equipment or pay out bonuses to where all the accounts start with 10k. This typically reduces the Corporation's income to near zero on the tax return. Except this year.

In Nov they had nearly 1 million extra in the bank, but where already showing a -127k loss. But they took the money out, paid the bonuses and now have a -971k loss. I can't explain how this happened.

Why would spending down cash reduce their taxable income? Whether they buy equipment, pay bonuses/dividends, or burn it in pile out back, that wouldn't change their income for the year. Suppose the firm starts with zero cash at the start of the year. It sells its widgets, all the customers pay cash. At the end of the year, you have Pile O' Cash. Because you had income from widget sales, even if you buy equipment for the whole Pile O' Cash, you wouldn't have changed your income for the year. You still had the income to buy the equipment.

Plus, paying out bonuses--I guess those would count as deductible expenses if they aren't paid to the owners--that would make no sense from a tax perspective. A C corporation pays 21% FIT in the US; if they make more than 40,525, taxable income, they'll pay at least 22% FIT. This strikes me as a plan that would push them into at least the 22% bracket, so they'd pay more tax by taking bonuses as individual ordinary income than by letting the C corporation get taxed, and letting it increase the for value. What am I missing?

 

[BIG E]

The problem is - there's a common misunderstanding out there that total cash receipts - total cash disbursements is what your ending P & L should be when they're overlooking non-cash transactions like depreciation limitations (that is NOT applicable in this case), inventory fluctuations that definitely impact P & L computations, unbooked receivables and payables, money booked in advance for future revenue recognition or visa versa. The oversimplified concept of cash income less cash expenses = net profit isn't the whole story.