JUNE 2007
TIP #1
THE TAX CONSEQUENCES OF LOANING MONEY TO YOUR BUSINESS
(Don't forget the interest)
Often buiness owners infuse there business with additional cash. How you structure this capital investment has a direct effect on the tax consequences. In addition, the type of entity you have created for your business also effects the tax consequences.
If you have loaned money to your business, you are required to charge interest on the loan; otherwise, interest will be inputed to you. This means interest will be computed on the outstanding loan balance at the current rates and each payment will be considered to include interest. While you are required to report the interest as income on your personal return, your business is permitted a deduction for the interest paid.
When you make a loan to your business, tis important to charge an adequate rate of interest and document the loan with ta stated repayment schedule. Failure to do so may cause the IRS to reclassify a loan as a contribution to capital. This could have unintended consequences. You will not recover a loan that is reclassified as a contribution to capital unless you withdraw money from your business. If you business is incorporated, generally this distribution must be made in the form of taxable wages or a taxable dividend. Repayment on a loan are not taxable to the extent of the principle....
TAX TIP #2
SUBSTANTIATING BUSINESS EXPENSES
(Don't forget to save all those reiceipts)
One of the most important things a business owner can do is keep good records throughout the year. If the IRS examines your tax return, any expense you failed to document could be disallowed. Keeping receipts, credit card statements, Bank statements, and cancelled checks is a must. Set aside a spot in your office or home for expenses and sort through them periodically. Group similar expenses together and total them. Good record-keeping will give you a better idea of the types of expenses you are incurring and what your bottom line will be. An added benefit is that, when it comes time to file your tax return, you will be more prepared.
If you are audited by the IRS and you have combined your personal and business income and expense into one banking account you are asking for a large problem due to the fact that the IRS might consider the deposits that you enter as business and not personal income, and you would have to prove otherwise. It is the same with expenses, certain expense will then have to be again proven by you as personal. and not business.
BY HAVING BUSINESS CHECKING ACCOUNT YOU WOULD ONLY HAVE TO HAVE THAT ACCOUNT AT THE AUDIT.
This information is given to you as tax tips for you to refer to at anytime.
Franklin Katz, ATP
Frank's Tax & Business Service
120 York Road
Kings Mountain, NC 28086
(704) 739-4039
Fax: (704) 739-3934
TIP #1
THE TAX CONSEQUENCES OF LOANING MONEY TO YOUR BUSINESS
(Don't forget the interest)
Often buiness owners infuse there business with additional cash. How you structure this capital investment has a direct effect on the tax consequences. In addition, the type of entity you have created for your business also effects the tax consequences.
If you have loaned money to your business, you are required to charge interest on the loan; otherwise, interest will be inputed to you. This means interest will be computed on the outstanding loan balance at the current rates and each payment will be considered to include interest. While you are required to report the interest as income on your personal return, your business is permitted a deduction for the interest paid.
When you make a loan to your business, tis important to charge an adequate rate of interest and document the loan with ta stated repayment schedule. Failure to do so may cause the IRS to reclassify a loan as a contribution to capital. This could have unintended consequences. You will not recover a loan that is reclassified as a contribution to capital unless you withdraw money from your business. If you business is incorporated, generally this distribution must be made in the form of taxable wages or a taxable dividend. Repayment on a loan are not taxable to the extent of the principle....
TAX TIP #2
SUBSTANTIATING BUSINESS EXPENSES
(Don't forget to save all those reiceipts)
One of the most important things a business owner can do is keep good records throughout the year. If the IRS examines your tax return, any expense you failed to document could be disallowed. Keeping receipts, credit card statements, Bank statements, and cancelled checks is a must. Set aside a spot in your office or home for expenses and sort through them periodically. Group similar expenses together and total them. Good record-keeping will give you a better idea of the types of expenses you are incurring and what your bottom line will be. An added benefit is that, when it comes time to file your tax return, you will be more prepared.
If you are audited by the IRS and you have combined your personal and business income and expense into one banking account you are asking for a large problem due to the fact that the IRS might consider the deposits that you enter as business and not personal income, and you would have to prove otherwise. It is the same with expenses, certain expense will then have to be again proven by you as personal. and not business.
BY HAVING BUSINESS CHECKING ACCOUNT YOU WOULD ONLY HAVE TO HAVE THAT ACCOUNT AT THE AUDIT.
This information is given to you as tax tips for you to refer to at anytime.
Franklin Katz, ATP
Frank's Tax & Business Service
120 York Road
Kings Mountain, NC 28086
(704) 739-4039
Fax: (704) 739-3934