Non-Deductible Expenses
(Continued)

Donations that are not deductible in the current year can be carried forward five years and deducted in future years if actual donations in one of those future years is less than the 10 percent limit. This is what happened in year two of my example. After five years, if we were not able to deduct the extra $10 from year one, that amount would then become a permanent difference and thus never deductible.

Using my example, if you added up the net income for year one and year two, you get $465 — but we only have $270 in the checkbook. The difference between these two figures of $195 just happens to equal the total in my permanent difference column.

If you add some zeros to my figures or look 10 or 15 years out, you can see that the “gap” could get very large.

So what does all this mean? It means you, as the business owner, may have to regularly give some money to the business in the form of loans or capital stock, or you will always have to leave some profits in the business and pay federal income taxes on cash you do not have.

LEN PYTLAK is a certified public accountant in Ann Arbor, Michigan, and author of more than 65 business and tax articles for numerous publications. He may be contacted at 734.663.1313.

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