Business Owners - Taking Money Out Of A Business - 2021 | Best Guide - CPA Clinics
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.
For example, a shareholder of a corporation can make a loan to the corporation, and subsequent repayments of principal are not taxable to the shareholder. This may seem straightforward. However, if the loan and repayments are not set up and processed properly, with specific documentation in place, the IRS can reclassify the funding as nondeductible capital contributions and classify the repayments as taxable dividends, resulting in unexpected taxation. A weak loan structure can also create a danger zone where a court can “pierce the corporate veil,” resulting in personal liability for the business owner. These negative effects can occur in several different situations.
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.
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