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View Full Version : Legal way to defer money so can't be taxed?


tiedeman
11-09-2004, 10:36 PM
Ok, question for all you people before I go talk to my accountant tomorrow. One of my customers is going to pre-pay to me here at the end of this month or next month for next year. Approx $12,000. What is a good legal way that I can put this money for I won't get taxed over $1800 dollars? I have thought about putting it into a retirement fund, but also how soon after the first of the year can I dip my fingers into the honey pot to take some of the money out?

Please those that only know what they are talking about respond. I need some ideas and a game plan before going in to talk to my accountant.

fastlane
11-09-2004, 10:50 PM
I do the paper work when the job is finished. I deposit the "down payment" when I get it.

Mueller Landscape Inc
11-09-2004, 10:59 PM
This will depend on what setup you have for your company; sole prop, s-corp. LLC. Simple solution for this year is to deposit the money after the start of the new year or buy something you need now with the money.

As you said, your accountant will be the knowledgeable person to ask.

Randy Scott
11-09-2004, 11:28 PM
Sorry for responding without knowing the answer you need, but I don't get the question?

Your customer is paying you in advance for services rendered, correct? You're paying taxes on that no matter what you do with it. Right? You take money from a customer, create an invoice to apply it to, and you pay the state and feds their (unearned) amount, wouldn't you? I'm confused as to your question. Is there a different way to handle pre-payments? Sooner or later you're going to have to pay the appropriate taxes I would think. Unless the person gives you cash, it's going to be traceable to somebody, and any deposit over $10K usually creates questions within any banking type situation I thought.

tiedeman
11-09-2004, 11:55 PM
that is what I don't know, do I have to pay the state and federal taxes, or is there a way around it with something like this. Maybe I can find a back door or something That is why I thought that I would ask some of you

dvmcmrhp52
11-10-2004, 12:30 AM
There's always a back door, it just depends on where you are at and where you want to be on many levels.
You and your accountant know your particular situation best,
and of course conscience does play a role............... payup :D

HOOLIE
11-10-2004, 12:39 AM
Couldn't you just hold the check until Jan 1? That's what my old boss did, although none of them were for 12k. Hopefully the funds would still be available by then.

Little o
11-10-2004, 01:55 AM
Tiedmann,

You are can probably record the money collected as a deposit, because it is for services not yet provided. Set up a balance sheet liability called customer prepaid. Debit Cash and Credit the new liability account. As the services are rendered, you will reverse the Debit the liability account and Credit the Income account the appropriate fraction.

The only hangup you may have is that somewhere in the IRS code is that you have to claim your income recognition method. (ie. Cash or Accrual).
Run it by the accountant.

Hope that helps.

Doug

DFW Area Landscaper
11-10-2004, 04:46 PM
Cash the check immediately. If you hold it til the end of the year, you never know, it may bounce or something.

Cashing a check and realizing income are not at all equal. The customer might call you back on the 3rd of January and say "You know, I changed my mind. I want a refund."

You recognize the revenue when you do the work next year. Therefore, you pay the taxes on that revenue next year, not this year, even though you've already been paid.

Record the payment as a liability in Quickbooks. If you use statements, just apply the payment to his account. As you do work on the customer's account next year, apply the pre-pay to the balance due.

Later,
DFW Area Landscaper

boonhogganbeck
11-10-2004, 05:04 PM
Hi, I'm a CPA and I'll throw in my 2 cents. It really depends on your method of accounting as someone else pointed out. If you are a cash basis tax payer then it's taxable when received. If you are an accrual basis taxpayer it's taxable when earned. If you are cash basis, you would likely ask that they not pay you until January, if payment is for the calendar year. If accrual, then credit an unearned revenue liability with a corresponding debit to cash. The liability is debited to revenue ratably over the next year (as the revenue is earned). This is just a nutshell explanation and you should really talk this over with your own accountant. In case you decide to wait until the first of the year to collect the payment (assuming you are a cash basis tax payer) hold off on cashing the check.

Good luck - talk to your CPA!!

Lawnworks
11-10-2004, 10:05 PM
What is the difference b/t LLC and an S-corp?

boonhogganbeck
11-11-2004, 09:55 AM
What is the difference b/t LLC and an S-corp?

An S-corp is a flow through entity for tax purposes and a corporation for legal purposes. It has to file a Form 1120S every year for tax reporting. The shareholder(s) of the S-corp receive a form K-1 stating their distributive share of corporate income and expense. The shareholder(s) report the information from the K-1 on page 2 of schedule E with their personal 1040. S-corp earnings are not subject to self employment (SE) tax, but you do have to pay yourself a salary with withholdings. The govt still wants their share FICA from you. SE tax is FICA/FUTA for a sole proprietor ship.

An LLC is a limited liability company. This is a legal designation. An LLC is known as a "disregarded entity" for tax purposes. An LLC can be taxed several different ways. It can be taxed as a partnership, a corporation, or a sole proprietorship. An LCO that operates as a single member LLC can still report on schedule C of the Form 1040 for tax purposes. If you elect schedule C or partnership status (Form 1065 and K-1 to partner, similar to S-corp) you do pay SE tax which is computed on Schedule SE of the 1040 (half is deducted "above the line"). If you elect the corporate tax status you must pay yourself a salary.

I hope this helps - see your own CPA for your specific situation.

Green in Idaho
11-11-2004, 06:13 PM
I would add that it doesn't matter when you 'cash' the check.-- for cash basis records.
It matters when you have constructive receipt of the check and the 'right' to the money.

i.e. if you win a lottery on Dec 25, payable on 12/26 it is taxable in that year despite the fact you went on a partying rampage for 2 weeks before you actually went to the lottery office in January to collect.

For another example you receive your paycheck 12/20 --it gets taxed in that year. There is no question,"Did you cash and deposit all your paychecks before 12.31?" When it is actually cashed is irrelevent.

Again that is for a cash basis taxpayer which is most of the bunch.

In practical terms however, it takes additional effort to idenitfy those dates but possible (if you know what I mean).

DGI
11-15-2004, 07:01 AM
You're still liable for it as gross income as soon as you get it no matter if you wait to put it in the bank. Something about "availability of funds."

Evan528
11-15-2004, 10:30 AM
You're still liable for it as gross income as soon as you get it no matter if you wait to put it in the bank. Something about "availability of funds."

I was never aware of that. Every year I end up holding checks all through out December and deopositing them January first so that I dont have to pay taxes on them untill the next year. I know the tax will still be paid but for some reason I like entertaining myself with the fact that ill have a lower tax bill this year (and higher one next year lol).

MacLawnCo
11-15-2004, 11:17 AM
I was never aware of that. Every year I end up holding checks all through out December and deopositing them January first so that I dont have to pay taxes on them untill the next year. I know the tax will still be paid but for some reason I like entertaining myself with the fact that ill have a lower tax bill this year (and higher one next year lol).
Not only that, but you can earn interest on your tax liability should you choose to use it wisely.

tiedeman
11-18-2004, 12:47 AM
well talked with my accountant a couple days ago (took a little while to get ahold of her) she basically told me get ready to pay up. Since I am cash basis there is no way around it.

Mueller Landscape Inc
11-18-2004, 01:13 AM
You're still liable for it as gross income as soon as you get it no matter if you wait to put it in the bank. Something about "availability of funds."

I might be wrong, but I don't believe having a check and having the cash in your account or possession is the same thing. The check says "pay to the order of..." meaning that you don't have the money until the check clears the bank.

boonhogganbeck
11-18-2004, 09:36 AM
I might be wrong, but I don't believe having a check and having the cash in your account or possession is the same thing. The check says "pay to the order of..." meaning that you don't have the money until the check clears the bank.

It is same. This is called the constructive receipt doctrine. This comes from case law from way back.

Frontier-Lawn
11-18-2004, 02:48 PM
what i would do i cash the check pay the tax and deposit the rest in to a high intrest rate account to recoupe the loss

dcondon
11-18-2004, 08:52 PM
[QUOTE=tiedeman]Ok, question for all you people before I go talk to my accountant tomorrow. One of my customers is going to pre-pay to me here at the end of this month or next month for next year. Approx $12,000. What is a good legal way that I can put this money for I won't get taxed over $1800 dollars? QUOTE]

Is this for more than just mowing???? Are you doing a major job?????

tiedeman
11-18-2004, 09:21 PM
its for lawn maintenance, fertilization, and landscaping maintenance