Welcome to the first of our 4- part series, where we discuss how business owners can withdraw money from a business with limited tax impact. In this month’s blog we discuss some general information about classifying money that is put in to a business, and money that is taken out of a business.

When taking money out of a business, transactions must be carefully structured to avoid unwanted tax consequences or damage to the business entity. Business owners should follow the advice of a tax professional to make sure financial transactions are controlled and do not cause unanticipated taxation or other negative effects.

 

Classifications

When a business owner provides funds to the business, it can be classified as one of the following transactions.

• Capital contribution.
• Loan to the corporation.
• Repayment of a loan from the corporation.
• Expense reimbursement.
• Purchase.

On the other hand, when an individual takes funds from a business, the transaction can be classified as:

• Taxable dividend or distribution of profits.
• Nontaxable distribution.
• Nontaxable expense reimbursement.
• Taxable wages.
• Loan to the shareholder.
• Repayment of a loan from the shareholder.

Failure to tightly control the nature of the transactions can have negative effects on the business and the business owner. Next month we will share information on how sole proprietors can withdraw money from their business.

It is always important to reach out to your tax professional to discuss your unique situation. Feel free to contact Jason Bailey or myself with any questions.

 

Article from TheTaxBook

The TaxBook was voted the #1 Tax Research Product in the CPA Practice Advisor’s Reader’s Choice Awards from 2013-2020. Click here to learn more.

 

 

Blog by Kim Storen, EA – Tax Team Lead, Senior Tax Professional

Learn more about Kim and the rest of the Storen Financial team here.