[guscusi]

I have just closed my FY in my C Corp on 07/31/2009, with a profit above $100,000. I would like to "pay myself" and one employee bonuses, to be accrued during that FY, as an "achievement bonus" for the good results that FY. The problem is that the FY cloed and the checks would go out in Auguts. We use the accrual method, so logically, it should be acceptable for the IRS. This would bring down the Net Profit and lower my Income Tax.

Is this acceptable for the IRS? I would make the payment as one more salary payment for each, with all the SS, MC & Inc. Tax payments & witholding.

[ArcSine]

Accruing bonuses to the employees as of Jul 31 are deductible for the FYE Jul 31 as long as they're physically paid by the 15th day of the 3rd month following the year end. Since you're planning on cutting checks in August, you're fine.

Unfortunately, that's not the case with respect to any party who owns > 50% of the C corp. For such person, the C corp can deduct the bonus as of the day the payment becomes taxable to the recipient (August, in this case); hence the corp gets the deduction for its FYE Jul 31 2010.

That's why there's always such a scramble during the final days of a C corp's year to estimate the net profits, and get 'em cleaned out via bonuses to the officer / shareholders before midnight of the last day.

This is all courtesy of IRC Sec 267, in case you need to pursue it further. Best regards,

[guscusi]

Very professional answer. Do you suggest any other means of reducion, post-FY closing, the Net Profit? I own 100% of the shares.

[ArcSine]

Couple of things you might consider:

Carefully scrutinize all the expenses the corp will be paying during August--and even into September, I'd say--and see if any can be properly allocable to July. For example, your check to the power company in mid-August might cover a service period running from mid-July to mid-Aug. If you hadn't already accrued it, then some portion of that August check could be accrued at Jul 31. The key to having the accrual get the IRS' stamp of approval, of course (should they choose to even bring it up) is making sure the accrued expense is truly a July expense. (Side note: You might need to have some of your vendors work up invoices for you, clearing indicating what portion of the bill is pre-Aug 01.)

Also, if you have a qualified retirement plan covering yourself and your employees, there might be some accrual planning opp there. For that one, though, you should get the definitive scoop from a retirement plan tax pro (which excludes yours truly, sorry). If this strategy is do-able, though, you might be able to trim your July 31 net by a hefty chunk.

Best of luck!

[guscusi]

Thank you very much for all your help! By the way, do you know of any software that would help for the daily Journal Entries and General Ledgers, other than the hyped and overated , "bells & whistle" laden, Peachtree & Quickbooks. Do accountants or bookkeepers actually still annotate in a physical book these entries. I would imagine most would be using some software that would speed up the process and create the ledgers from these Journals... and P&L + Bce Sheet. I do not need a software that writes checks, POs, etc... just daly Journal + G. Ledgers.

[ArcSine]

I have no hands-on with either of these--so I can't offer anything but a "give 'em a look-see"--but there's a couple of freebies out there from two of the "names" you might want to have a peek at:

Microsoft Office Accounting Express; Intuit / QB Simple Start.

As they're free versions of their more feature-laden siblings, it's possible they're just watered down enough to fit the bill for you.

I'm afraid I'm not plugged in to the acctg software space enough to be of much help. However, there are some good accountants who roam the virtual halls here at AMHD who I'm sure could give much better advice on this question. I'm sure they'll be drifting in soon, so stay tuned to see if they have anything to offer up on this one.

[guscusi]

Thank you so much. So, must I understand that there still are many companies doing the old fashioned hard copy bookkeeping (recording in actual physical Journal Entry & General Ledger books), on a daily basis?

Thanks again!!

[morgaine300]

Just throwing in a bit of extra stuff, since I have used some of that software, and do.

I'm sure there's places still using a manual system. If it's a small enough place, especially like just one person working out of their home or something, that could be common. Or they could just use Excel to keep track of it and total things at year end, etc. When I worked for a CPA for a short period, we got a lot of hand stuff, but it was mostly just some daily sales sheets and other junk, and we'd take it all and put it into the computer. Those people were only doing portions of their books. In fact, if they were using Quicken, I'd still have to take their summary stuff and stick it into Peachtree cause Quicken just doesn't do a lot of what needs done. (I think it s***s.)

I personally like Peachtree. And I can actually ignore a lot of those bells and whisles and only use what I need to use if the company doesn't require all the junk. I can even simplify Peachtree to the point of using it for my own finances. I almost can't handle stuff like Money, and those programs have their drawbacks. (Not to mention that I'm used to Peachtree so it's easier for me to gear it towards what I want than use another program.)

As for "annotating in a physical book" -- yeah, sort of. But paper, not book.

Most of the easy entries are being done through the checkbook entry section, or through invoicing, etc. For instance, I take the checkbook and start entering checks and telling it where I want to charge it or what payable I want to take it off. It'll still print me out a report in journal format, automatically crediting the total to cash.

Any "general journal entries" -- i.e. adjusting entries or other month-end or year-end junk I got to do -- I never just pop those directly out of my head into the computer. Even if they're easy, I want everything in one place, and I do many, many entries at once (not just the easy ones). Some entries require some time-consuming calculations, and sometimes there's entries that take up a half a page, or even a full page. So I use a regular old two-column journal sheet and write all that out first. And I keep those, and I can put them in a folder with any pertinent notes. Then when I have a few pages of those, I enter them all at once into Peachtree. It's actually more efficient that way.

(Toto, we're not in accounting class anymore.)

OK - that doesn't tell you what software you should be using, but you seemed curious, and I'm always willing to talk. LOL.

I've never thought of Quickbooks as having too many bells & whistles, but maybe it does for what you need.

One question is if you can just ignore the stuff you don't need. It's probably going to be difficult to get something that perfectly fits what you want, so you have to get something that includes everything you need and will end up with extras that you don't need.

Someone just mentioned something called GnuCash. I've never heard of it. Some ones I've heard of are Simply Accounting, MYOB, DacEasy (the one I learned at school, the DOS version :-)). Except for DacEasy, I haven't used the others and couldn't tell you anything.

I did find a site with several different ones, with some reviews, and a little chart of comparison of features. It might help. But I also just did a Google on "accounting software small business reviews" and you can look at the different stuff. Or leave off "reviews" and I'm sure you can find some more detailed info about these. I personally think it's difficult to "recommend" a particular software without knowing exactly what you need and don't need.
Accounting Software Review 2009 - TopTenREVIEWS

[ArcSine]

(toto, we're not in accounting class anymore.)

:p

someone just mentioned something called gnucash. I've never heard of it. Some ones I've heard of are simply accounting, myob, daceasy (the one I learned at school, the dos version :-)). Except for daceasy, I haven't used the others and couldn't tell you anything.

I did find a site with several different ones, with some reviews, and a little chart of comparison of features. It might help. But I also just did a Google on "accounting software small business reviews" and you can look at the different stuff. Or leave off "reviews" and I'm sure you can find some more detailed info about these. I personally think it's difficult to "recommend" a particular software without knowing exactly what you need and don't need.
Accounting software review 2009 - toptenreviews

An appreciative tip o' the hat to MG3.

[guscusi]

Thank you ArcSine & Morgaine300. Precisely, I found that "Top 10 Review" site yesterday and came across a softw. That seems very good, called "Bookkeeping". It is very simply & logical, allows direct Journal Entries, and although has all the bells & whistles, seems more logically laid out than Quickbooks & Peachtree (although I am not an expert on those 2). It even has a 30d. Free trial and it downloads in seconds. At this point, I am between "tweaking" my excel double-entry spreadsheets or giving this software a try. The advantage of the software should be the speed in creating reports.

Thanks again.

[morgaine300]

Hopefully you've found what you were looking for. :-)

[guscusi]

Accruing bonuses to the employees as of Jul 31 are deductible for the FYE Jul 31 as long as they're physically paid by the 15th day of the 3rd month following the year end. Since you're planning on cutting checks in August, you're fine.

Unfortunately, that's not the case with respect to any party who owns > 50% of the C corp. For such person, the C corp can deduct the bonus as of the day the payment becomes taxable to the recipient (August, in this case); hence the corp gets the deduction for its FYE Jul 31 2010.

That's why there's always such a scramble during the final days of a C corp's year to estimate the net profits, and get 'em cleaned out via bonuses to the officer / shareholders before midnight of the last day.

This is all courtesy of IRC Sec 267, in case you need to pursue it further. Best regards,

Hello,

Thank you again for your above reply. I looking into this again. I have read the IRC Sec 7, but am afraid I might not interpret it correctly.

My case is as follows:

- C Corp closed its FY on 07/31/2009
- I Wish to pay myself a Bonus, to be "accrued" before that FY ending
- C Corp has not filed the 1120 Tax Return yet
- I file my tax return on a calendar year basis
- I own 100% of the C Corp
- C Corp uses Accrued method

Despite what you explained for related parties, if I make a payment of a Bonus "accrued" in the FY ending 07/31/2009 for the C Corp. I will also be including this income in my FY2009 Tax Return, so I believe it may be acceptable to the IRS, as the payments will be reported in the respective FYs (1120 & 1040) they were accrued. I will receive the payment in 2009 and pay Inc Tax on the 2009 Return, and the C Corp will include the Bonus expense and SS charges in FY ending July 32. The "accrual" is also legitimate, since it was a great year, despite the recession, and a Bonus is totally justifyable.

I believe that what that IRS rule aims at is that both, the individual and the C Corp, allocate the impact of te Bonus in the year they are accrued, and this would be OK, in my "humble" interpretation.

Thank you again for looking into this...

[ArcSine]

Your thinking on that point makes sense on an intuitive level. But there was a specific reason I put the word "day" in bold in my earlier post. Here's an excerpt from the pertinent part of IRC Sec 267:

"... then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made... " (boldface mine).

In other words, Sec 267 places your accrual-basis corporation on the cash basis with respect to payments made to you, as a related party (as defined therein). So regardless of when the corp accrued your bonus, it will be treated as a deduction of the corp on the day that it's paid to you.

So if it's paid to you in September, say, it's true that you'll pick it up on your 2009 personal return as income. But to the corp it'll be deemed a deduction of that September day on which it cuts your check. That puts the corporate deduction onto its year running Aug 01 2009 to Jul 31 2010.

The purpose behind this day-specific provision in 267 is to prevent a calendar-year corporation from accruing a bonus to a controlling shareholder on Dec 31, and then paying it in early January, thereby causing the shareholder's tax on the income to be deferred for an entire year after the corp took a deduction for the same item. Folks used to be able to game the system with that little timing ploy, and Congress got kind of cranky about it.

Not what you wanted to hear, I know... but I'm afraid it's the straight scoop.

[guscusi]

Your thinking on that point makes sense on an intuitive level. But there was a specific reason I put the word "day" in bold in my earlier post. Here's an excerpt from the pertinent part of IRC Sec 267:

"...then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made..." (boldface mine).

In other words, Sec 267 places your accrual-basis corporation on the cash basis with respect to payments made to you, as a related party (as defined therein). So regardless of when the corp accrued your bonus, it will be treated as a deduction of the corp on the day that it's paid to you.

So if it's paid to you in September, say, it's true that you'll pick it up on your 2009 personal return as income. But to the corp it'll be deemed a deduction of that September day on which it cuts your check. That puts the corporate deduction onto its year running Aug 01 2009 to Jul 31 2010.

The purpose behind this day-specific provision in 267 is to prevent a calendar-year corporation from accruing a bonus to a controlling shareholder on Dec 31, and then paying it in early January, thereby causing the shareholder's tax on the income to be deferred for an entire year after the corp took a deduction for the same item. Folks used to be able to game the system with that little timing ploy, and Congress got kinda cranky about it.

Not what you wanted to hear, I know...but I'm afraid it's the straight scoop.

Dear ArcSine,

Thank you a million, once more. You know,. after submitting my question to you today, I found a similar explanation on an Intuit website (Small Business Answers and Information - Intuit Community) and foinally understood your point. And your above new explanation could not be clearer. Thank you once again for such great advise and quick replies!

[ArcSine]

Always a pleasure, amigo. And congrats on having such a good year for FYE Jul 31... keep rockin' with it!