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S Corp - profit (taken to personal tax return) not taken out of business
Posted by theaccountingdept on 03/06/2010 - 12:38
Everyone in the whole world probably knows this, but for the life of me - I can't keep it straight. A small S Corp, has a large profit that goes to her personal tax return - and doesn't take anything out of the business except a reasonable paycheck. Can she take the previous profits and consider them a loan that the company owes her so she can pay her taxes? Her original investment was little - so if she needs to take it as a distribution, is everything above that investment taxable to her? (AGAIN?)
- 3264 reads
The payday
There are many options and possibilities when operating a small business. However, everyone's circumstances are different and I professionally and personally would seek advice from your accountant and or accountants. A wrong decision can cause a lasting negative effect. You need to comprehend what approach you are aiming to achieve.Paying your taxes is a responsibility in itself. Borrowing from your company is a possibility for your personal taxes, however if your business structure was established well, your taxes really should be minimal and manageable. If you are unable to project and manage your commitments, then I suggest something is not working to your advantage.
-- Andrew
S corp with reasonable salary and cash left in business
Why not take a raise in salary by enough to pay some of the taxes? Any other distribution of cash that is not a return of capital is a dividend, and is taxable as well.
S Corp - profit (taken to personal tax return) not taken out of business
The responses here speak loudly for the need for a couple of years of continuing education in taxation . . . and it is not dumb to use profits to pay the taxes on those profits.
No worries
Keith, it looks like we were both writing at the same time! Client doesn't need a loan, she just thinks she does because she's cash poor. She stockpiled cash in the S-Corp that she should've put in her pocket when the "large profit" was earned, reported and taxed. The previous profits left on deposit were effectively "a loan from stockholder" that the company owes her. In the prior year(s), she reported the "large profit" as ordinary income from corp's K-1 on her 1040. She should've taken a comparable distribution then. It was already taxed in the year earned.
Agree with Sherri
When client takes $ out now, it's not a loan. Cr. Cash and Dr. Retained Earnings account. It's a nontaxable distribution because it was already taxed through the income tax returns previously filed. To clarify & oversimplify - RE, aka Equity, is what Sherri is calling "Basis." If client takes out more than all profits ever earned, then it's a loan to shareholder in the amount that Basis < 0.
Loans from Corporations - not a good idea
This is a poor investment accounting practice.
Paying any type of debt with a loan is not sound financial planning advice. If a business owner is at this level of needing to borrow funds from any source even if from their own business then a hard look look-over needs to be done with the business as well as with the owners assets and lifestyle.
I would not advise this type of behavior but rather I would look at getting a tax free loan from the IRS. Call them up and see if the amount can be paid at a later date. Let's say in three months.
Sherri
The client's basis increases by income generated by the business, so she can take a distribution that would be equal to her investment plus any income she has paid tax on previously and current income then less any losses the business incurred. I hope this helps.