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Corporate income taxes for a fluctuating startup?

My start-up had an unprofitable 2012, a very profitable 2013 and we are looking at an unprofitable 2014. Starting in 2012 myself (CFO), CEO and COO all drew no salary and then returned to 50% salaries in mid 2013 to get the company over a hump. Since 2013 was so good we have a massive tax bill even though we didn't have salaries. Can I deduct full salaries as deferred compensation? At what point would this compensation have to be paid? Thanks!

Answers

William Deveneau
Title: Managing Partner
Company: Veracity Financial Group LLC
(Managing Partner, Veracity Financial Group LLC) |

Couldn't you use a loss carry-forward from the previous year to help? I am not sure of your exact situation, but a loss in 2012 could be carried into 2013 to reduce some of the tax bill.

Anonymous
(Head of Finance) |

Yes, that helps some. The issue we are struggling with is if we knew we were going to have a great year we would have drawn normal salaries. But we didn't. In Q1 and Q2 we still were not forecasting exceeding our NOL carryforward. Then we had great success in Q3 and Q4, and now we have to pay taxes instead of taking normal pay.

Topic Expert
Michael Bateman
Title: Principal
Company: The Bateman Company
(Principal, The Bateman Company) |

As a start-up it is important that you retain good legal and financial services. People that will routinely advise you on matters such as this. In your case, you should be able to apply your loss carry forward from '12 to your '13 return and during Q3 and/or Q4 the answer might have been to reimburse your yourself and the CEO for your back pay shortfall - and possibly a bonus on top of that. However, since you're planning a loss in '14 you may need the cash to help cover '14 losses which you can carry forward to '15 and beyond. Think I recall that CA only allows NOL going back 3 years, so you should check this. Note: If your pay gets too high, the IRS might call it a dividend, but I don't think they will question a reasonable salary/bonus. Also, be careful about relay on tax loss carry credits from the state of CA. In 2010, the over reaching CA legislature retroactively eliminated the '08 & '09 loss carry forward. I'm not aware of the Feds ever doing such.

S McDowell
Title: Controller
Company: SCI Electronics
LinkedIn Profile
(Controller, SCI Electronics) |

Did you file an extension? If you did you could record on your books a bonus in 2013 to get the corp income down and then immediately pay it out now. Uncle Sam seems slow on the download on picking that crap out. You normally have to pay out by mid-March. Worst case the Federalis deny the deduction and you get hit with interest and possibly underpayment penalty. They'll deny the deduction for 2013 and allow it in 2014 since that is when constructive receipt occurred.

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