It’s always interesting to me what questions I get in our twice monthly business and real estate tax, accounting and financial coaching sessions.
It makes sense that there would be themes for questions during live sessions. Someone asks something that makes you think of something for your own unique circumstances. So a group conversation takes place as to how it may apply.
This last week, though 3 people had questions that were very similar and the questions all came in before the session started. Obviously, this is a topic a lot of people are interested in right now.
Maybe you’ve had this question as well.
The fundamental question is, “How can I take money out of my business?”
We’re not talking the basic kind of answer (write a check, use your debit card, etc) but rather, how do you do it in the smartest, most tax advantaged way?
And, as usually happens with tax questions, the answer is “It depends.”
The first question I’d ask you has to do with what type of business structure you have for your business.
For example, if you have a C Corporation, it is a separately taxed entity. It is a little more complicated to take money out of a C Corporation. There are basically four ways to do it. First, if you made a loan to the C Corporation in the past, it can make a loan repayment to you. Typically, that would be part principle, which would not be taxable to you, and part interest, which would be. However, the interest that is taxable to you is a deduction to the business.
Another way to take money out of your business is to draw a salary. This is also taxable to you but is a deduction for the company.
The least advantageous way to take money out of the C Corporation is to have a dividend. The dividend is not deductible for the Corporation but it is taxable to you. That’s where the term double taxation comes from.
Finally, you could take a loan from a corporation. You do need to be careful with this, however. A small short-term loan from your Corporation probably isn’t going to be a problem. However, if you take a large loan out for an extended period of time the IRS may call it a deemed dividend. If that occurs, it will be taxed to you just like a dividend. And remember that’s double taxation. The Corporation doesn’t get a deduction and you have to pay tax on the income.
The other common business structures, schedule C, schedule E, partnership, an S corporation are all flow-through entities. It is much easier to take money out of these type of entities and avoid a bad tax consequence. Let’s just use an S corporation as an example. An S corporation could pay you a salary. And, in fact, the IRS wants to see your profitable S corporation paying you salary. Otherwise, you’re knocking to pay your fair share of payroll taxes. But one way obviously, to take money out of your company is going to be through taking a salary. It’s a deduction for the company income for you, so no bad tax consequence. You could also take a distribution. In this particular case, because an S corporation is a pass through entity, you don’t have the same tax issues that you do with the C Corporation. The distribution is not taxable to you and it is not a deduction for the company. You could also take a loan from the company. In some cases, it’s better to take a loan than a distribution and that has to do with your basis in the company. This is something that your experienced CPA should be able to calculate for you.
Otherwise, if you have a schedule C or partnership, you cannot take a salary. So, your options are to take a distribution or a loan.
In the next few months, we’re going to cover a range of subjects in coaching including smart depreciation strategies, tricks & tax traps of S Corporations, year-end tax strategies for real estate investors and for business owners, how to perform a quality cost segregation study that the IRS will love, winning the real estate professional argument PLUS a template to track your hours and how and when to use independent contractors post-Trump Tax Plan. Plus, of course, I’ll take your questions live during the session or, if you’d prefer, cover questions you’ve emailed to me.
The email address for questions is Coaching@USTaxAid.com. Remember that coaching is an added bonus for year-round tax clients. To find out more about coaching, becoming a year-round tax client or to schedule a private consultation with me, please Contact Us.