Can my S-corp invest profits into stocks instead of taking distributions?

Wait, so you're saying if my S-corp makes $100k in profit and invests all of it in stocks instead of sending me a check, I STILL have to pay taxes on that $100k personally? Even though I never received the money?? That seems crazy!

Yes, that's exactly right. With an S-corporation, you pay taxes on your share of the company's income regardless of whether it's distributed to you. This is called "phantom income" - money you're taxed on but haven't physically received. The S-corp files an informational tax return (Form 1120-S) and gives you a Schedule K-1 showing your share of the profits, and you report this on your personal return. The IRS doesn't care if the money stays in the company's account, gets invested, or is distributed to you - you still owe personal income tax on your portion of the profits.

Well that's disappointing! I was hoping this might be a way to time my income better. So basically there's no tax advantage to keeping the profits in the S-corp vs taking them as distributions?

Exactly. From a federal income tax perspective, there's no advantage to keeping profits in the S-corp versus taking them as distributions. You'll pay the same amount of tax either way since S-corp profits flow through to your personal return regardless of whether they're distributed. The only significant tax planning opportunity with an S-corp is around reasonable compensation - ensuring you pay yourself an appropriate salary subject to employment taxes, with remaining profits potentially avoiding self-employment taxes. But that's separate from the investment question you asked about.

How accurate is this AI thing? Can it actually give actionable advice or is it just generic stuff I could find on Google? I'm interested but skeptical.

Does it handle more complex situations? I have an S-corp but also some rental properties through an LLC and a W2 job. Would it understand how everything fits together tax-wise?

The accuracy impressed me - it's not just generic advice. It spotted specific deductions I was missing and identified exactly how much I could safely allocate between salary and distributions based on my industry and profit levels. The recommendations were tailored to my specific numbers and saved me about $7,500 last year. It handles complex situations really well. My buddy uses it for his S-corp, rental properties and W2 income together. The AI analyzes how different income streams affect each other and gives you a unified strategy across all your tax situations. It's especially good at identifying how changes in one area ripple through your entire tax picture.

How does this even work? The IRS phone lines are impossible to get through on. Are you saying this service somehow jumps the queue?

Sounds like a scam. I seriously doubt any service can magically get you through to the IRS faster than everyone else. They probably just keep you on hold themselves and then connect you when they finally get through, charging you for the privilege.

It uses technology to navigate the IRS phone system for you. Think of it like those restaurant apps that hold your place in line. It calls repeatedly using automated systems until it gets through, then alerts you to join the call. It's not jumping the queue, just handling the tedious part of repeatedly calling and waiting on hold. Not a scam at all. I was skeptical too until I tried it. They don't keep you on hold - you don't join the call until they've already navigated through the IRS phone tree and are at the front of the queue. The time savings is real. I spent hours over multiple days trying to get through before using this, then got connected in minutes. They're solving a real problem with the notoriously overloaded IRS phone system.

This is an interesting idea! How complicated is it to maintain both an S-corp and a C-corp? Are there specific types of income that work better in each structure?

It definitely adds complexity - you'll need separate accounting, additional tax filings, and clear boundaries between the businesses to avoid IRS scrutiny. The administrative costs are higher, but can be worth it at certain income levels. For entity selection, my general approach is keeping stable, service-based income in the S-corp where I need regular cash flow, while placing more speculative ventures, intellectual property development, and investment activities in the C-corp where I can reinvest profits for long-term growth without immediate personal taxation. The key is having legitimate business purposes for each entity - you can't just use them as tax shelters.

This is what I do with my S-corp. I maxed out a Solo 401k with both employer and employee contributions. You can put away WAY more than a regular 401k this way, and the employer contributions are a business expense that reduces your pass-through income. Win-win!

@Ben Cooper This is exactly what I needed to hear! I hadn t'even considered retirement plans as a way to handle excess profits. Can you give me a rough idea of contribution limits for a Solo 401k with an S-corp? I m'wondering if this could handle a significant portion of my unexpected windfall this year while still giving me the tax deferral I was looking for.

@Dmitri Volkov For 2024, Solo 401k limits are pretty generous! You can contribute up to $23,000 as the employee plus ($7,500 catch-up if you re'50+ ,)and up to 25% of your S-corp compensation as employer contributions, with a total limit of $69,000 $76,500 (with catch-up .)The key is that your S-corp salary determines the contribution limit - you need W-2 wages to make contributions, not just distributions. So if you pay yourself a $100k salary, you could potentially put away the full $69k between employee and employer contributions. This is way more effective than trying to defer taxes through corporate investments!

This is really helpful advice! I'm particularly interested in the Section 199A QBI deduction you mentioned. My S-corp is in consulting/professional services - do those typically qualify for the 20% deduction? I've heard there are some restrictions for service businesses at higher income levels. Also, when you mention "smoothing income over multiple years," are there specific timing strategies that work well with S-corp pass-through taxation? I'm trying to understand if there are legitimate ways to manage the timing even though I can't defer the actual tax obligation.

@AstroAdventurer Unfortunately, consulting and professional services often face restrictions under Section 199A at higher income levels. There's a taxable income threshold ($191,950 for single filers, $383,900 for married filing jointly in 2024) above which "specified service trade or business" (SSTB) activities like consulting may not qualify for the full 20% deduction. However, the phase-out isn't immediate - there's a phase-out range where you might still get partial benefits. And the definition of SSTB can be nuanced depending on exactly what type of consulting you do. For income smoothing with S-corp pass-through, some legitimate timing strategies include: accelerating equipment purchases or other business expenses into high-income years, timing when you complete and bill for projects (if you use cash accounting), and strategically timing any asset sales that might generate losses to offset gains. You could also consider prepaying certain deductible expenses like insurance or rent if it makes business sense. The key is these have to be legitimate business decisions, not just tax avoidance. A good tax professional can model different scenarios to show you the impact of various timing decisions.

This is fascinating! I had no idea DB plans could allow such high contribution limits. How do you handle the complexity and costs? Are we talking about needing a full-time pension administrator or can smaller firms manage this effectively? Also, when you mention committing to funding for several years, what kind of flexibility do you have if business income fluctuates significantly year to year? I'm intrigued by the potential tax savings but want to understand the practical implications before exploring this route.

@Jade Santiago You don't need a full-time administrator, but you do need specialists. I work with a Third Party Administrator (TPA) who handles the actuarial work and compliance filings - costs about $3-5k annually depending on plan complexity. The setup fees were around $10k initially. For funding flexibility, that's where it gets tricky. DB plans require "minimum funding" each year based on actuarial calculations, so you can't just skip years if business is slow. However, there are some design options that can build in flexibility - like cash balance plans that blend features of DB and DC plans. The key is really running projections before committing. My TPA modeled different scenarios showing required contributions vs. tax savings over a 5-7 year period. In my case, even with the administrative costs and funding commitments, the tax deferral benefits were substantial enough to justify the complexity. But it's definitely not right for everyone - you need consistent substantial income and the discipline to maintain the plan long-term.