Situation: A company, an S Corporation, produced substantial profits during the first 6 months of their fiscal year. This becomes taxable personal income to the owners if it remains profits. How would you advise the CEO and owners to make best use of these excess profits?
Advice from the CEOs:
- Use some of the funds to invest in new opportunities for the future growth of the company.
- Prepay significant costs like software licenses multiple years in advance. Make sure that you attend to your accounting so that you properly reflect the ongoing profitability of the business. Otherwise, what you may believe is profitable in future years will not reflect true profitability because you will not be accounting for all of your true expenses.
- Is anyone in the company deserving of a one-time special bonus for performance or a salary increase?
- It may make sense to take dollars out of the company and to diversify owners’ investments by investing in real estate, stocks, etc.
- Check out the current rules around 401K programs that may allow you to invest increased amounts per year per person. Talk to your financial advisor about the details and regulations surrounding these programs.
- List your alternatives and compare the anticipated ROI, on an after-tax basis, of the various options. This will help you to evaluation options including:
- Reinvesting in the business – various options.
- Investing outside of the business – various options.
- Talk to your financial planner about the choices.