profile

Straight Talk for Small Business Owners: Real Strategies. Real Results. No Fluff.

The 20% Penalty for Sitting on Your Own Cash

Published about 1 month ago • 3 min read

ISSUE NO. 53

WEEKLY CFO BRIEF

A practical weekly field note from Basta CPA.

THIS WEEK'S STORY

The 20% Penalty for Sitting on Your Own Cash

Samy Basta, CPA

Carlos called me last month. He runs a property management company here in the Bay Area. Good business. Steady.

He told me his plan, proud of it. "I leave the profit inside the company. I don't pull it out. That way I don't pay tax on it personally. Smart, right?"

He had about four hundred thousand dollars ($400,000) just sitting in the company.

I asked him one question. "Carlos, is this a C-corp?"

It was.

So I told him the hard part. The IRS has a rule for what he was doing.

They call it the Accumulated Earnings Tax.

If a C-corp holds onto more than two hundred fifty thousand dollars ($250,000) in profit without a real business reason, they can hit you with a 20% penalty. On top of the tax the company paid.

Carlos went quiet.

The thing he got wrong is common. He thought parking cash was a tax move. It is not. The IRS sees a pile of cash with no purpose and asks one question.

Why is this money here, instead of in the owner's pocket, getting taxed?

You can hold cash. But you need a reason. A real one.

Equipment you plan to buy.

A property you are saving toward.

A project on the books.

Write it down. A plan on paper is the difference between safe and a 20% bill.

Carlos had no plan written anywhere. Just a habit. And he wasn't paying himself a real salary either. For a C-corp officer, that's a red flag.

So we fixed both.

We set him up with a reasonable officer's salary and mapped out what the rest of the cash was for. The salary pulls money out the right way. It keeps him compliant and shrinks the pile the IRS is watching.

Quick note from your CFO​
​If you run a C-corp and you let profit sit because pulling it out feels expensive, stop. Go look at your balance sheet this week. Anything over two hundred fifty thousand dollars ($250,000) in retained earnings without a documented reason is a target. It might cost you more than you think.

— What I Would Check This Week

•✓•

Pull the retained earnings number off your C-corp balance sheet right now. Anything over two hundred fifty thousand dollars ($250,000) is the line where the IRS starts asking questions. A high number is not the problem. A high number with no reason behind it is.

•✓•

Check whether you took a real officer's salary this year. If you run the company and pay yourself nothing, that's a red flag on its own. Money pulled out as salary leaves the pile the IRS is watching.

•✓•

Write down a business reason for every dollar you are holding. Equipment, a property, a project on the books, all of it counts if it's documented before tax time. A plan on paper is your defense. A habit is not.

•✓•

Flag any cash that has been sitting with no purpose for more than a year. That's the money most likely to trigger the 20% penalty. Build a payout schedule or assign it a job, but do not let it just sit.

FEATURED RESOURCE

You could be bleeding $9K on a single project without a clue.

Your construction business is fully booked, the invoices are going out, and yet the bank account just doesn't add up. That quiet, nagging feeling that something's off? It's a visibility problem.

— On My Radar

01

Most firms just wait for referrals to happen.

The best firms build systems that make asking, earning, and multiplying referrals a predictable part of growth.

​Read more →​

02

Don't keep measuring the wrong numbers and finding out too late that profit was slipping all along.

Smart construction owners track a few key metrics that expose problems long before they show up in the bank account.

​Read more →​

03

Many families spend years building wealth but never prepare the next generation to manage it.

Early, intentional involvement is one of the most important estate planning decisions you can make.

​Read more →​

Want a clean view of cash flow, job margin, and owner pay?

Book a quick CFO review with Basta CPA.

— Couple More Things

Is buying a truck before year-end a good tax strategy?

Buying a truck only to lower taxes is usually poor planning. Buy the truck your business needs. Then take the deduction you qualify for. That’s the right order, and it’s the one that actually holds up.

Construction businesses need tax planning built around job costing, equipment purchases, cash flow, payroll, crews, and growth.

Most construction business owners overpay taxes by $20K–$70K+ every single year — not because they're doing anything wrong, but because their CPA doesn’t offer them the right tax strategy.

Basta and Company

100 Pine Street, Suite 1250
San Francisco, CA 94111

​Unsubscribe · Preferences​

Straight Talk for Small Business Owners: Real Strategies. Real Results. No Fluff.

Samy Basta, CPA | Fractional CFO | Helping Small Businesses Grow Smarter and Stronger

I'm a CPA and Fractional CFO helping builders, investors, and entrepreneurs scale smarter. I write about real-world growth strategies that actually work. Subscribe and join 1,000+ business owners leveling up every week!

Read more from Straight Talk for Small Business Owners: Real Strategies. Real Results. No Fluff.

ISSUE NO. 57 WEEKLY CFO BRIEF A practical weekly field note from Basta CPA. THIS WEEK'S STORY The money you can pull out of your company that never gets taxed. Samy Basta, CPA Mike runs a framing crew here in the Bay Area. Good builder. Busy all year. But every time we talk, he sounds tired. Last month he told me the same thing I hear from a lot of owners. "Samy, I can build the job. It's everything around the job that's killing me. The texts. The emails. The follow-ups. I fall behind and...

6 days ago • 3 min read

ISSUE NO. 56 WEEKLY CFO BRIEF A practical weekly field note from Basta CPA. THIS WEEK'S STORY The money you can pull out of your company that never gets taxed. Samy Basta, CPA Lisa runs a small architecture firm here in the Bay Area. Six people. Good year behind her. We hopped on a Zoom call and she said, "Samy, I'm making money now. But it feels like every dollar gets taxed twice. Payroll takes a cut. Then I pull cash out and it gets hit again. Is this just how it works?" I asked her one...

13 days ago • 3 min read

ISSUE NO. 55 WEEKLY CFO BRIEF A practical weekly field note from Basta CPA. THIS WEEK'S STORY Stop your staff from draining their retirement on a bad week. Samy Basta, CPA Lisa runs a small architecture studio here in the Bay Area. Eight people. Good ones. She called me last month, rattled. "My best project architect just pulled money out of his 401(k)," she said. "His kid had a medical thing. He didn't have the cash. So he raided his retirement and ate the penalty." She felt awful. She pays...

20 days ago • 3 min read