Many companies are subchapter S (sub S) corporations.  This means that the corporation does not pay income taxes, but instead these are paid by the shareholders on their pro-rata share of the pre-tax income of the company that is reported to them.

                                        

Typically, distributions of cash are made to the shareholders to cover them for these taxes that they will have to incur.  Usually this works well.  The shareholder gets the cash in plenty of time and gets the information they need to report the taxable income on their returns.

But sometimes it doesn't work well.  Tax time can have a way of creeping up on people, especially come April for the final payment for the year.  The taxes are calculated, but cash has been used for other purposes. 

                                       

 

This was the situation with a new client that I had begun working with. They had a good past year. However, success can require money. Money was going to inventory and receivables to grow the business. Nothing had been set aside for taxes yet. This was a bigger deal this year. Higher profits meant more needed to be set aside. The client was in a deeper hole. To buy time, they filed an extension on the return.

 

I was able to find some tax savings during my first day that they had missed that amounted to nearly 100k. I then lined up some financing to cover the rest of the gap. The client got the return filed and took care of the past taxes.

 

The current year was turning out to be another record year. This time, being there during the year, I could act proactively.  I had them put in tax distributions into their budget and make them on a timely basis. Their projected balance sheet and cash flow reflected tax payments. Rather than having a panic attack the next April, they were already set.

 

If you have a sub S corporation, remember to schedule in your tax distributions. It's a major cash item and you don't want to have to scramble to meet ends from your personal resources.