Client is a C Corp. This years BOOK loss has made his retained earnings negative. He has a taxable profit due to non-deductible items. What are the ramifications of this (if any). Thanks!
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Non-Deductible
What were the non-deductible items for?Originally posted by Maggie View Post
Were they for personal expenses paid by the corporation for the shareholder? If so, you have dividends paid to him.Jiggers, EA -
Roll-Forward
Maggie, if you have negative Retained Earnings because of a current year loss (and not dividends), it is usually an indication that there is not enough cushion in prior year earnings to accommodate a deductible loss. This is a general statement, and certain scenarios can be contrived to make this untrue. But most likely you have a loss that you can't do anything with on current year 1120.
The loss is not without some redeeming features. To the extent taxable earnings exist, you may carry the loss back to the prior two years and offset income. If your loss year is 2006, then you would "roll back" the loss first to 2004 and exhaust that taxable income if possible. Then roll whatever is left of the loss into 2005.
The creation of negative retained earnings means that the loss probably exceeds all the income the corporation has ever made (unless there were dividends). If this is the case, you will still have loss left over after exhausting 2004 and 2005 taxable income. You may then roll forward into 2007.
Taxpayer may choose also to roll his gain forward without rolling backward at all, if he so desires. TTB has a good discussion on this on page 18-11.Comment
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non deductible expenses
the non-deductible expenses are for 1/2 entertainment.....Comment
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Something's Fishy
Maggie, I reread your post, and now have the scope of your information. Sorry.
What we're hearing is that his entertainment expenses are so large that they cause the corporation to lose more money than their entire retained earnings.
I think he just has to pay up and live with it. I detect a real problem, though, in managing this expense, as well as a rather jaded view that it is even deductible at all. It's not our job to audit our clients, but I'd be willing to wager that very little of this has been spent entertaining customers or vendors, but most of it probably has been spent on himself, friends, and family members.
Is there a remedy, assuming his entertainment is legitimate? Two remedies come to mind. Firstly, if the entertainment is reimburseable from a customer, ALL of it would be deductible. The customer must then bear the 50% hit. If the customer, however, is a tax-free organization or governmental agency, then it wouldn't matter. Another would be an accountable plan where the owner submitted an expense report and the corporation reimbursed the owner only 50% of the amount of the expense. The corporation would be entitled to deduct only what they reimbursed and the owner would not be able to deduct the difference on a 2106. This wouldn't be popular, but it would eliminate this difference between book-to-tax.Comment
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Book income vs taxable income
It is highly likely that book income and taxable income will vary. If you follow GAAP depreciation rules for the books, you cannot use the same depreciation for tax purposes.
If you pay penalties or fines you can deduct them on the books, but not on the tax return.
You can deduct 100% of entertainment and meals on the books but not on the tax return.
The book figures go on the balance sheet and are the figures to be reported in retained earnings.Comment
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