Handling Retained Earnings for Payroll Expenses in LLC - Tax Strategy Needed

If they switch to S-Corp taxation, wouldn't that create other complications with how they handle distributions? Also, isn't changing fiscal years pretty difficult for pass-through entities unless you have a specific business reason the IRS accepts?

You're right that S-Corp taxation creates its own considerations. The owners would need to receive "reasonable compensation" as W-2 employees before taking distributions, but this can still be advantageous compared to paying self-employment tax on all profits. As for changing fiscal years, it is more restricted for pass-through entities, but there are situations where the IRS will approve it. They would need to demonstrate a business purpose for the change, such as natural business cycle or seasonal fluctuations. It's not simple, but it's possible with proper documentation and business justification.

That sounds interesting but kind of vague. How exactly does this work? Is it some kind of accrual accounting method or something? I'm in a similar situation but wary of solutions that sound too good to be true.

I'm curious how this would actually work from a tax law perspective. Are they suggesting some kind of reserve account treatment? Because I was told by my CPA that pass-through entities basically can't avoid taxation on retained earnings regardless of what they're earmarked for.

It's fundamentally about transitioning to accrual-based accounting methods with specific documentation procedures for reserved funds. Their system helped identify eligible business expenses we could accelerate into December to offset some of that cash reserve. As for the tax law perspective, they don't claim to magically make taxes disappear. They work within IRS guidelines to properly categorize funds and create a defensible position for how certain reserves are treated. They recommended a specific structure where some funds were pre-paid into certain expense categories that helped reduce our year-end tax burden while remaining completely compliant.

How does this service actually work? The IRS phone lines are constantly jammed, so I'm curious how they're able to get through when regular people can't.

Sorry, but this sounds completely made up. There's no way some service can magically get you through to the IRS faster than anyone else. The IRS phone system is completely overwhelmed and they certainly don't give special access to third parties. I'd be very careful about claims like this.

The service works by using an automated system that continually calls the IRS and navigates the phone tree until it reaches a human agent. When an agent is found, you get a call connecting you directly to them. It's not magic or special access - it's just automation handling the frustrating part of waiting on hold. I had the same skepticism you do. I thought it sounded too good to be true, but it actually works because they're just using technology to handle what would otherwise be hours of hold time. They don't claim to have special IRS relationships - they just automate the calling and waiting process that most business owners don't have time for.

Would changing the payroll schedule that drastically cause problems with our employees? I'm thinking they might not like having their pay periods shifted around, especially around the holidays when cash is tight for many people.

It does require some careful communication with your team. We gave our employees about 3 months notice before implementing the change, and offered short-term advances to anyone who needed help with the transition. Most people adjusted within a month or two. It also doesn't have to be a permanent change - some businesses do a "bonus" mid-December payment that effectively prepays some January work, then return to normal scheduling in January. The key is getting those funds out of your business account before December 31st so they don't contribute to your year-end retained earnings.

C-Corp has double taxation though. They'd pay corporate taxes and then personal taxes on any dividends. With $9.5m ARR, seems like they'd end up paying more overall unless they plan to reinvest almost everything back into the business.

You're right about the double taxation concern. It works better for businesses planning significant reinvestment rather than regular profit distributions to owners. A possible middle ground might be the "hybrid approach" where they elect S-Corp taxation but establish a reasonable salary structure and timing that helps manage cash flow better throughout the year. They could also look into establishing separate entities for different business functions, though that adds complexity.