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Form 2210 & Subchapter S Income

Luca Pacioli Jr.'s Profile

My S corporation is a manufacturer. I am the only stock holder.
Yearly sales $500k.
My salary $70k per year (all taxes are withheld).
A bonus paid at the end of the year $63K (all taxes witheld).
Net income after above and all other expenses comes to $108k (report on K1)

My preference is to keep monthly or quarterly net income (profit) in the cash account
in case of unexpected need for capital expenses, need to procure inventory, or
as a cushion in case the stuff hits the fan.

When preparing form 2210, Underpayment of Estimated Tax by
Individuals, Estates, and Trusts, section Part I Annualized Income Installments for each of the 4 periods
I would usually enter the wages as reported on my W2. For the last period I would enter in the
the K-1 dividend since this income is unknown until the books are closed.

Is this the correct/legal IRS approach to entering in income for the 4 quarters for 2210 Annualized Income Installments?

I have been told by my accountant that instead I should be going back to each of the S-Corps corresponding end quarters and I should enter some kind of assimilation of what my income would have been had I taken withdraws from the Net Income of each quarter so that my income is more "reasonable". I'm sure the IRS would love to have that but as the business owner and manager my preference is to keep cash as a reserve for when it is needed, and declare the dividend at the end of the year when the books are closed.

I do respect my accountant however I'm pondering what is reality should the time come and I'm standing in tax court.

Answers

Victor Shah
Title: Account Manager
Company: FlowRocket, LLC
(Account Manager, FlowRocket, LLC) |

Reading your question reminds me of an Accounting Principle Conservatism. As per accounting principle, you must account for all your future probable expenses and not to account for future gains.
There is always a possibility of having a contingency reserve for probable expenses and/or losses.
Not to have that is always in favor of IRS that they get higher taxes. However, legally nothing is wrong in what you're doing. In given circumstance, neither you nor your accountant is wrong. It is more about obtaining a practical accounting approach which is also not illegal or out of principles.

Let me know if this helps.

Luca Pacioli Jr.
Title: Owner
Company: Manufacturing
(Owner, Manufacturing) |

Victor,

To clarify your response to my questions:

1) Is it acceptable to declare the final "income" at the end of the year, when the books are closed and report that dividend on the K-1, you are saying YES.
And,
2) Alternatively, it is acceptable to 'guesstimate' to the income quarterly. YES.

Either method works so long as the income calculated at year end is reported.

Yes?

Victor Shah
Title: Account Manager
Company: FlowRocket, LLC
(Account Manager, FlowRocket, LLC) |

Luca,

Yes! I, myself would exercise the first option, though!

We at FlowRocket provide the bookkeeping and consulting service, working with your CPA to work on tax savings.

I would be happy to help you in any manner i can!

For further clarifications and guidance on your given question on estimating income, you can reach out to me at victoratflowrocket [dot] com.

Let me know if this helps!

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