Do companies get taxed on money deposited by owners?
I just started a business (startup) and wanted to do the right thing by having a bank account for the company and putting all the business expenses on the business account. Now, I am in NY and I know that you dont' have to pay tax if you are suffering a loss or have no revenue except for the $300 annual franchise fee. Now, when i deposit say $1300 every month as my own money in the business bank account so that the expenses will go through, do i have to pay tax on my $1300?
Secondly, do i have to do a quarterly tax filing even if the $1300 is my own money? Up until now i never had this kind of a situation. Since it's a startup we have no revenue at this point so any money deposited is my own money going in. I never had this kind of money of my own to run a business so i am confused.
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The way you're describing it, you'll have to pay taxes because it's just revenue into the business account. You need to balance the ledger - talk to a local accountant and/or tax lawyer. – Dnbrv 12 years ago
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thanks but that sort of sounds messed up to me. thats not revenue but my own money. – Ariel 12 years ago
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The ledger, GAAP, and the IRS don't care about the source of the money for the most part when it's deposited into the company's bank account without a corresponding liability (e.g. the creation & assignment of shares). The situation is the same with loans: it's revenue until the principal owed isn't on the books. – Dnbrv 12 years ago
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@dnbrv there may be something mucked up with the ledger, but ariel is correct that he should not be taxed on the money. The issue is in recording it correctly as a loan from the shareholder and not revenue (i.e. the company is incurring debt to him instead of to his vendors). – Elie 12 years ago
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@Elie: I'm not saying he should be taxed. I'm saying that he'll be taxed only if he just deposits the money without the proper records. He still needs an accountant to sort this out. – Dnbrv 12 years ago
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No - you should not pay taxes on that money. As dnbrv mentioned it's critical you track this correctly. Don't just run your business off of your bank account, at a minimum get a Quickbooks online account or try Wave Accounting (it's free & it is what I use) You need to keep track of your money and make sure it is categorized appropriately. – Ryan Doom 12 years ago
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@RyanDoom Yes, i am tracking it. I use inDinero. ANd i just made the first deposit in April, which marked beginning of 2nd quarter. So all should be good. Thanks – Ariel 12 years ago
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@ariel: Tracking with inDinero isn't enough. I'll repeat: an equalizing transaction *must be entered in liabilities* in the balance sheet. Moreover, your accepted answer is dangerous - see my comment. – Dnbrv 12 years ago
3 Answers
I believe these payments would just be treated as capital contributions. It has the effect of increasing the basis you have in your ownership of the company. On the balance sheet, it counts as an asset, with offsetting shareholder equity. There is no tax effect to this sort of contribution.
See http://www.irs.gov/publications/p542/ar02.html and search for "paid-in capital".
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@ariel: This is very dangerous advice. Capital contributions mean that extra shares must be issued proportionate to the amount of capital contributed. The number of outstanding shares has impact on some rules in IRS, SEC, and local Department of State (the one that issued you the articles of incorporation). – Dnbrv 12 years ago
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@dnbrv That's not necessarily true. The OP makes no mention of what type of business he has. In terms of an LLC, Chris's advice is accurate. LLCs don't distribute shares, so the only thing that will change is your basis in the company. In terms of a corporation, you may be correct. It's also possible that he's just a sole proprietor. – Zuly Gonzalez 12 years ago
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@ZulyGonzalez, Yeah, everything around me is S-corps so I think in terms of them. LLC ownership is different indeed. – Dnbrv 12 years ago
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dnbrv -- please see the link I put up above. From that publication, "Contributions to the capital of corporation, whether or not by shareholders, are paid-in capital. These contributions are not taxable to the corporation." – Chris Fulmer 12 years ago
Generally, the answer would be no. The money you deposit is a shareholder loan, and needs to be paid back, eventually, to the owner. It is neither an expense nor revenue.
Speak to a local accountant to get your books set up correctly.
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In order for it to be a shareholder loan, there needs to be some sort of an IOU signed "from me to me" plus a liability recorded on the balance sheet. – Dnbrv 12 years ago
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@dnbrv I'm not saying he isn't missing documentation and that his books are already set up correctly - in fact, I said that he needs to get his books set up by an accountant locally. But the reality is that he has loaned his company money which he will eventually want back, so he should not be declaring it as revenue, but as a loan, and he should get it documented right. – Elie 12 years ago
No, the money you put in the business as your contribution to it is not taxable. What will be taxable is all your revenues less any expenses you may have. Any money you contribute to the business is NOT revenue.
Also, you mentioned that you have expenses but no revenue? Keep in mind that IRS may disallow your business deductions if you have continuous losses (expenses more than revenues) for a number of years because IRS will treat that activity as a hobby.
As others mentioned, talk to an accountant.
