How to Make Capital Contributions and Owner Draws

One of the most confusing things for new business owners can be knowing how to get money in and out of their company.  Most new businesses loose money in the year of its conception.  As a result there are bills to be paid, but there is no money in the bank account.  Often, the new business owner doesn’t know how to get money into the company to pay the necessary bills or how to record the money going in.

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There is a simple answer for this. All the business owner needs to do is deposit money from a personal account into the business account.  This is called a capital contribution.  It is not income to the company.  It is an equity account that shows up on the balance sheet.

Once the company starts to make a profit and capital contributions are no longer needed, there comes the exciting time when the business owners get to take money out of the company.  For some new business owners this also can be confusing.  We had a client that by the end of the year had forty thousand dollars in her business account because she didn’t know how to take it out.

Taking money from your company is just as easy as doing a capital contribution.  Simply write yourself a check and report it as an owner draw.  An owner draw is also an equity account and will show up on the balance sheet.  It is important to record these withdraws as an owner draw because an owner draw is not an expense to the company.

So moving money into and out of your business is as easy as writing check or making a deposit. The thing that may be a bit difficult is know how to record the transactions in your bookkeeping software.

For more information about how to properly perform and track capital contributions and owner draws without worrying about being audited and to learn more about other tax deductions the IRS considers red flags, visit http://avoidbeingaudited.com/.

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Home Office Tax Deduction: How to take it and Avoid Being Audited

This week we are going to start focusing on some of the tax deductions that people may be missing on their taxes.  We feel this is timely as tax season is upon us.  So today we will start with a common tax deduction that is often misunderstood, the home office deduction.

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Have you ever considered taking a home office deduction for your business?  One of the great things about owning a business is that it allows you to deduct things that you already pay for, and deducting a home office expense is a great example of this.  A Home office is a great tax deduction because it enables you to take expenses in your house that you are already paying for and deduct them from your taxes.    For example, you’re already making a mortgage payment and maintaining a household.  By taking a home office deduction, you will be able to take a portion of these expenses you are already paying for and deduct them from the taxes you pay.

Many people think that claiming a home office for your business is a red flag for an audit. This isn’t true—especially in this economy.  A lot of people are moving their offices into their home to save expenses and overhead.  So, working out of your home is very common and not a reason the IRS is looking to audit someone.  In our 37 years of experience as accountants and tax professionals, our firm has only seen one time when the home office was disallowed.

There are, however, some very important rules regarding a home office. If you don’t follow these rules, your home office deduction could be disallowed in an audit. As mentioned before, we have seen one time that a home office deduction was disallowed. This happened because the client did not follow the rules.  Following the IRS rules is not something that you need to be afraid of nor is it difficult to do.  You simply need to know the rules and follow them.  To avoid an audit and to properly understand how to take a home office deduction and to learn more about other tax deductions you may qualify for, click here.

If you are not sure you want to go the home office route, another option to taking a home office is renting your home office to your corporation.  However, the rules governing the corporate rent are different than the standard home office deduction.  To learn how to properly take the corporate rent for a home office and to learn more about other tax deductions you may qualify for, go to http://avoidbeingaudited.com.

More Tax Law Updates for the 2011 Tax Season

On December 17, 2010, President Obama signed the “Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010.” This Act extended many of the Bush era tax cuts.  Some of our previous posts have touched on this topic, but have only been our best guesses as to what might happen.  Here are a few things that were extended that will help you as you start your tax planning strategies.

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Social Security tax rates will be reduced by 2 percent. So the rate will drop from 6.2% to 4.2% for 2011 only.  This means that your paychecks will be slightly higher in 2011 because you will be paying in less to Social Security.  But be prepared for 2012 when the tax rate goes back up.

The Estate Tax Cut has been extended through 2012. This means that anyone who dies between December 31, 2009 through December 31, 2012 will fall under this tax cut.  The maximum tax rate is 35% and the exclusion rate is $5 million.

The child tax credit will stay at $1000 per qualifying child. This is good as it was scheduled to be reduced to $500.

As a part of the Health Care Reform Act, W-2s will have heath benefits reported on them. Though this amount is not yet taxed, the government will be using this information to track these values.

The individual tax rates are set to remain the same through 2012. This will be good because it gives you the opportunity to have a better idea of your tax rates will be for the next two years, which will make tax planning a bit easier.  However, it will create tax problems for the election year in 2012. Capital Gains Tax rates will remain the same as well.

As always, if you want more information about how to build a better tax strategy, save money on taxes, and stop worrying about being audited, visit www.avoidbeingaudited.com.

2011 Tax Law Updates

Once again, it is time to think about the upcoming tax season.  As you may have heard, the IRS has made some new laws regarding all who can prepare income tax returns.  Because of these rules you can expect to see some changes in the logistics of the way your taxes are prepared.

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A law that was passed by congress this year requires tax preparers to have each client sign a disclosure document. Basically this is a document that discloses the tax preparer’s practices and procedures, what the accountant expects from you and what you can expect from them.  It is for your protection as well as theirs.  It is possible you had to sign one of these in the past, but you will still need to sign one for each tax year and you will find that this new one has a little more information.  This is the case in our office any way.

Starting Jan. 1, 2011, all monthly payroll deposits will be required to be filed online. You can no longer make those deposits at the bank.  Also, for 2011, the rate for withholding social security tax has been lowered.  If this applies to you and you have any questions, call and talk to your payroll specialist.

We have received word from the IRS that due to the tax law changes that occurred on Dec. 17th, some tax returns may be delayed. Those who can claim the college tuition and fee credits, the educator expense, and those who itemize deductions on Schedule A (home interest and taxed, medical, donations, etc) may not be able to file until mid February.  The returns can still be prepared, but you will not be able to submit them until the official permission is given.  There are no delays for Corporate, LLC and Trust tax returns.

Here are the major tax deadlines you should be aware of:

  • W-2 and 1099 forms must be sent by Jan. 31, 2011
  • Corporate tax returns are due March 15, 2011
  • Personal, LLC and Trust tax return will be due April 18, 2011

If you have any questions, please feel free to contact us or visit our website www.soulence.com.