Tax issues for bonuses in a seasonal business
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In January, Don and Steve each invested $ 100,000 of cash to form a corporation to conduct business as a retail golf equipment store. On January 5, they paid Bill, an attorney, to draft the corporate charter, file the necessary forms with the state, and write the bylaws.
They leased a building and began to acquire inventory, furniture, display equipment, and office equipment in February. They hired a sales staff and clerical personnel in March and conducted training sessions during the month.
They had a successful opening on April 1, and sales increased steadily during the summer months. The weather turned cold during October, and all local golf courses closed October 15, which resulted in a significant decline in sales. Don and Steve expect business to be very good during the Christmas season and then to decline during from January 1 to February 28.
The corporation accrued bonuses to Don and Steve on December 31, payable on April 15 of the following year. The corporation hired a bookkeeper during February, but he does not know much about taxation. Don and Steve have hired you as a tax consultant and have asked you to identify the tax issues they should consider.
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Solution Summary
The 298 word solution presents an in-depth discussion of the bonus strategy proposed by the company for its officers, mostly explaining why it is a bad idea. Other suggestions about timing, year end and taxing options for the corporation are mentioned.
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The bonus strategy is common for 'C' corporations, but accrued wages to corporate officers must be paid by March 15 for a December year end corporation. If paid by March 15, the bonus amounts can be accrued and included in wages in the prior year. With a calendar year corporation and the seasonal nature of the business, bonuses payable on March 15 might be hard to pay after two months of no activity. ...
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