Expert: Ed McFarland - 2/23/2006

Question
Ed McFarland

Hello Ed,

  My brother and I have a small business. Our accounting method is cash basis Jan/Dec. The business was started June 03. For 03 and 04 I was the sole owner. For 05 my brother and I are the owners.

  For 05 we filled a 1065 and each received a K-1. For 03 and 04 all taxes were under my name.

  I hope this is not a stupid question?

  I just received the above forms from my accountant.

  Using a cash basis is it possible at the end of the year to have a positive balance in a checking account, which is not profit?

For example ( using round numbers), if at the end of 05 I have a Balance of $10,000, how is it that we can only split $1000 for additional withdrawal? During the 05 year each had already drawn $5000. This is a total income of $6000 each.

I have a feeling that additional profit was left at the end of 03 or 04 that was not withdrawn, but taxed!

I know this is a basic example, but having earned $20,000 with expenses of $12,000 = $8,000. Leaving $4,000 for each personal tax, and each able to withdraw $4,000. What am I missing?

I hope you have enough information?

Thank you for your time!

Respectfully,

Don


Answer
You are confusing cash in the bank with profit.

With the tax forms there should be 3 basic financial statements, a balance sheet, income statement and a statement of cash flows. Go back and read them.

Given a corporate tax rate of 25% on a profit of 8,000, (whatever the federal, state and local tax rates are substitute that number) the tax bill should be 2,000. Leaving 6,000.

My guess is that you received and booked some payables in December, that will be paid in January. Go back and look at the financials, particularly the income statement. If it isn't clear to you, have the accountant go over it with you.

Good luck