Sub-S loan repayment
Category: Business and Money > Accounting
Asked by: shian-ga
List Price: $20.00
25 Nov 2006 22:48 PST
Expires: 04 Dec 2006 15:40 PST
Question ID: 785617
My wife is a sub-s corp and opened her business just over a year ago. We funded her startup costs with a HELOC loan. Part of the HELOC was used for our home but we have records of how much was used for business. The business has been doing well and we put in more funds than she really needed. I spoke to our accountant about taking some of the funds out of my wife's business bank account to pay down the business portion of our HELOC and it does not appear we can do that. The accountant is telling us that the only way we can take out funds from the business banking account is either as payroll (with large tax consequences) or as distributions. I thought we should be able to just write a check from her business bank account to our HELOC account and pay down the business loan but that doesn't seem to be an option. Is this right? Unfortunately, we over-funded the business and now when we want to pay down the loan with business funds, the bulk of the funds (our accountant says we should take 80% in payroll and 20% in distributions) get taken through payroll so we loose a lot in taxes. When did we loose the ability to take funds out of the business bank account without taking them out as payroll or distibutions? Something about this just doesn't seem right. If we would have known we couldn't move funds out of the business account without loosing almost half of them to taxes, we would only have funded the business with the absolute minimum. But because we didn't know this we are going to be screwed by the taxes. I guess I should be glad we didn't throw more money into the business.
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Re: Sub-S loan repayment
From: abezon-ga on 26 Nov 2006 20:35 PST
You pull the money out & book it as a withdrawal of capital. However, you cannot deduct the withdrawal as a business expense, so it won't affect your taxes. (The corp could deduct interest it paid you, but you'd just have to declare the interest as income on your 1040, so it's a wash.) BTW, the IRS doesn't require you to take 80% of the income as wages. You are required to pay yourself a "reasonable salary" regardless of the business's profitability. This salary is subject to employment taxes. The required salary is what your wife would have to pay someone with her qualifications to do her work. This might be 20% of the gross earnings or 150% of the gross earnings. 80% is just a rule of thumb your accountant made up. Do some legwork to find out just how much it would cost to replace your wife at work & set that as her salary. (This may turn out to be more than 80%.) A business often switches from LLC or sole proprietor status to S-corp status once the owner's 'reasonable salary' is less than the business's net profit. You don't want to be an S-corp if the business is running at a loss!
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