17a Bronze OwnersTransactions
“Cookie Jar Accounting” Understanding and accounting for the owner's personal expenditures, contributions, or loan activity
Presented by: Diane C. O. Gilson President, Info Plus Accounting, Inc. Certified Advanced QuickBooks® Pro Advisor e-mail: [email protected] © Info Plus Accounting, Inc. Ann Arbor, MI 48104 web: www.BuildYourNumbers.com + www.InfoPlusAccounting.com
This session : The owner as a “privileged guest” Refining and sorting potentially “troublesome” transactions into their proper locations Important concepts Incoming from the owner Outgoing – to or for the owner Cautionary notes
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity…
Important to understand:
The owner is an entity separate from the company (sometimes hard to remember!) The owner’s personal expenditures are NOT business expenses The owner’s personal contributions are NOT income The challenge: What is really happening? Are o Assets increasing or decreasing? o Liabilities increasing or decreasing? o Equity accounts increasing or decreasing? o (Business) cost accounts increasing or decreasing? o Gross income is almost NEVER affected. You have some choice re: applying transactions to owner’s o Receivables o Liabilities o Equity Various tax implications: o Owner’s must maintain a certain “basis” (combination of owner‐related receivables and debt and equity that represents what’s “at risk” in the company). o Money taken out of the company in excess of “basis” can be considered additional personal income to the owner. o Owner‐guaranteed debt can be considered as part of the owner’s basis – so it’s important to label, or note, owner‐guaranteed debt. o So if you (or the owner) have questions, it’s truly worth talking to your tax advisor!
Money (or contributions) from the owner may come from (examples):
Checks written by the owner to the business (increase Cash, increase liability or equity) Checks written by the owner for property (increase asset, increase liability) Home equity loans taken out by the owner and proceeds loaned to the business (increase Cash, increase Due to owner, HELOC) Out‐of‐pocket expenditures (e.g., office supplies, building materials, cash paid to subs, loans to employees, travel costs, personal vehicle usage, etc.) (I often suggest setting up a “Business expense due to owner” credit card to accumulate small amounts due until they can be paid)
© Info Plus Accounting (may not be used or re-printed without permission)
Page 1
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity…
Personal credit cards used for business purposes o If balance was business‐related and normally used 100% for business (label as “owner‐guaranteed credit cards”, and increase credit card liability and costs as expenditures and/or interest are charged) o Cash transfers (100% to business) (label as “owner credit cards”, and increase Cash and credit card liability as expenditures and/or interest is charged) o Some only partial business (usually just reimburse owner as if it was for out‐of‐pocket expenditures OR write check for business portion directly to credit card OR establish separate credit card liability account [but difficult to assign interest and related interest deduction to partial liability]) Personal payment of company debt (increase Due to owner liability, decrease debt to outside parties) Physical assets transferred to the business (e.g., computers, tools, vehicles, property) (increase Fixed Assets for market value of assets received, increase equity account or Due to owner) Purchase of company stock (increase Cash, increase Stock [equity] account OR increase Due from owner, increase Stock [equity] account)
Expenditures out of the business to the owner (or on the owner’s behalf)
Checks (or other cash withdrawals) from the business to the owner (excluding payroll). Could be: o Equity‐related (owner is entitled to receive a distribution of earnings from the company) Note: Some company owners don’t take payroll – but only earnings (some tax implications) o What’s really happening? (decrease cash, decrease [debit] appropriate equity account). E.g.: Draw (sole proprietor or partner) Sub S distribution (Sub S corporation) Dividend (C Corporation)
© Info Plus Accounting (may not be used or re-printed without permission)
Page 2
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity… If the owner is expending funds on a variety of personal payments with company funds or debt, you may wish to track details, and create sub‐accounts under the Draw or Distribution account, e.g.: 1040 (personal tax) payments Owner’s auto payments Owner’s mortgage payments Etc…. NOTE: “Commingling of funds” is not recommended! It would be far better to write one larger check to the owner and have them pay personal bills from their own checking account to avoid the “piercing of the corporate veil” issue. But if it’s happening, tracking it may be helpful. o Payment of, or reimbursement for, normal business expenditures: E.g., Rent Office supplies Building materials Travel cost Mileage reimbursement Computer purchase Etc. May increase expense or assets if the liability is not already on the books (decrease cash, increase a cost account or an asset account) or Decrease liability if the payable to the owner was already on the books (decrease cash, decrease Due to owner account) o Payment to owner as a sub‐contractor (subject to 1099 reporting) (decrease cash, increase sub‐contractor cost) o Loan or interest payment to repay money or other assets loaned to the company by the owner (decrease cash, increase cost or decrease payable) o Loan to the owner (decrease cash, increase Due from owner) Job costs for “personal property” (non‐company) projects o Establish a “cost offset” account. E.g., (Less) Owner job costs to Bal Sheet o Determine amount of cost for accounting period (decrease cost for that job, increase Due from owner receivable, or decrease owner’s equity) NOTE: This approach nets the cost down to $0 so that it does not impact gross profit (a good thing!) o
© Info Plus Accounting (may not be used or re-printed without permission)
Page 3
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity…
Payments to vendors for the owner’s personal use (including family‐related expenditures), e.g.: o Medical expenditures o Loan payments o Personal travel o Personal grooming o Clothing o Groceries o Furniture o Vehicle repairs o Generally, things that a non‐company owner would not be able to deduct. (Exceptions: training, books, certain memberships, uniforms, certain safety clothing, business meals, etc.) o Non‐loan‐related payments to non‐employee family members o If in doubt, ask your tax advisor. (decrease cash, decrease Owner’s equity, or increase Due from owner) Company credit cards used for personal purposes o Same guidelines as above, but (increase credit card payable rather than decreasing Cash) Physical assets transferred out of the business (e.g., computers, tools, vehicles, property) o Removing assets from the company may have various tax implications. Check with your tax advisor… you may choose to just ask them to make the appropriate entries. Here’s what they’ll likely do: (decrease asset balance, decrease related accumulated depreciation, increase receivable from owner, or decrease loan payable to owner, or decrease owner’s equity)
Don’t forget…
Legalities (e.g., formal notes, interest arrangements, etc.) From my first tax professor: o The “big pig” story
In Summary
Owners have the right to add funds to a company, and remove funds from a company – but there are certain accounting and legal conventions that provide guidance regarding how those transactions should be handled and recorded. Additionally there are tax implications when the owner starts moving funds into and out of a company. So try to think of the owner as “someone who’s separate from the company” – with some special privileges and some special rules. Reminder: In a state or IRS audit situation, owner‐related transactions will come under close scrutiny, so “squeaky clean” is the best place to be!
© Info Plus Accounting (may not be used or re-printed without permission)
Page 4
Presented by: Diane C. O. Gilson President, Info Plus Accounting, Inc. Certified Advanced QuickBooks® Pro Advisor e-mail: [email protected] © Info Plus Accounting, Inc. Ann Arbor, MI 48104 web: www.BuildYourNumbers.com + www.InfoPlusAccounting.com
This session : The owner as a “privileged guest” Refining and sorting potentially “troublesome” transactions into their proper locations Important concepts Incoming from the owner Outgoing – to or for the owner Cautionary notes
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity…
Important to understand:
The owner is an entity separate from the company (sometimes hard to remember!) The owner’s personal expenditures are NOT business expenses The owner’s personal contributions are NOT income The challenge: What is really happening? Are o Assets increasing or decreasing? o Liabilities increasing or decreasing? o Equity accounts increasing or decreasing? o (Business) cost accounts increasing or decreasing? o Gross income is almost NEVER affected. You have some choice re: applying transactions to owner’s o Receivables o Liabilities o Equity Various tax implications: o Owner’s must maintain a certain “basis” (combination of owner‐related receivables and debt and equity that represents what’s “at risk” in the company). o Money taken out of the company in excess of “basis” can be considered additional personal income to the owner. o Owner‐guaranteed debt can be considered as part of the owner’s basis – so it’s important to label, or note, owner‐guaranteed debt. o So if you (or the owner) have questions, it’s truly worth talking to your tax advisor!
Money (or contributions) from the owner may come from (examples):
Checks written by the owner to the business (increase Cash, increase liability or equity) Checks written by the owner for property (increase asset, increase liability) Home equity loans taken out by the owner and proceeds loaned to the business (increase Cash, increase Due to owner, HELOC) Out‐of‐pocket expenditures (e.g., office supplies, building materials, cash paid to subs, loans to employees, travel costs, personal vehicle usage, etc.) (I often suggest setting up a “Business expense due to owner” credit card to accumulate small amounts due until they can be paid)
© Info Plus Accounting (may not be used or re-printed without permission)
Page 1
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity…
Personal credit cards used for business purposes o If balance was business‐related and normally used 100% for business (label as “owner‐guaranteed credit cards”, and increase credit card liability and costs as expenditures and/or interest are charged) o Cash transfers (100% to business) (label as “owner credit cards”, and increase Cash and credit card liability as expenditures and/or interest is charged) o Some only partial business (usually just reimburse owner as if it was for out‐of‐pocket expenditures OR write check for business portion directly to credit card OR establish separate credit card liability account [but difficult to assign interest and related interest deduction to partial liability]) Personal payment of company debt (increase Due to owner liability, decrease debt to outside parties) Physical assets transferred to the business (e.g., computers, tools, vehicles, property) (increase Fixed Assets for market value of assets received, increase equity account or Due to owner) Purchase of company stock (increase Cash, increase Stock [equity] account OR increase Due from owner, increase Stock [equity] account)
Expenditures out of the business to the owner (or on the owner’s behalf)
Checks (or other cash withdrawals) from the business to the owner (excluding payroll). Could be: o Equity‐related (owner is entitled to receive a distribution of earnings from the company) Note: Some company owners don’t take payroll – but only earnings (some tax implications) o What’s really happening? (decrease cash, decrease [debit] appropriate equity account). E.g.: Draw (sole proprietor or partner) Sub S distribution (Sub S corporation) Dividend (C Corporation)
© Info Plus Accounting (may not be used or re-printed without permission)
Page 2
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity… If the owner is expending funds on a variety of personal payments with company funds or debt, you may wish to track details, and create sub‐accounts under the Draw or Distribution account, e.g.: 1040 (personal tax) payments Owner’s auto payments Owner’s mortgage payments Etc…. NOTE: “Commingling of funds” is not recommended! It would be far better to write one larger check to the owner and have them pay personal bills from their own checking account to avoid the “piercing of the corporate veil” issue. But if it’s happening, tracking it may be helpful. o Payment of, or reimbursement for, normal business expenditures: E.g., Rent Office supplies Building materials Travel cost Mileage reimbursement Computer purchase Etc. May increase expense or assets if the liability is not already on the books (decrease cash, increase a cost account or an asset account) or Decrease liability if the payable to the owner was already on the books (decrease cash, decrease Due to owner account) o Payment to owner as a sub‐contractor (subject to 1099 reporting) (decrease cash, increase sub‐contractor cost) o Loan or interest payment to repay money or other assets loaned to the company by the owner (decrease cash, increase cost or decrease payable) o Loan to the owner (decrease cash, increase Due from owner) Job costs for “personal property” (non‐company) projects o Establish a “cost offset” account. E.g., (Less) Owner job costs to Bal Sheet o Determine amount of cost for accounting period (decrease cost for that job, increase Due from owner receivable, or decrease owner’s equity) NOTE: This approach nets the cost down to $0 so that it does not impact gross profit (a good thing!) o
© Info Plus Accounting (may not be used or re-printed without permission)
Page 3
Cookie-jar accounting: Understanding & accounting for the owner’s personal expenditures, contributions, and loan activity…
Payments to vendors for the owner’s personal use (including family‐related expenditures), e.g.: o Medical expenditures o Loan payments o Personal travel o Personal grooming o Clothing o Groceries o Furniture o Vehicle repairs o Generally, things that a non‐company owner would not be able to deduct. (Exceptions: training, books, certain memberships, uniforms, certain safety clothing, business meals, etc.) o Non‐loan‐related payments to non‐employee family members o If in doubt, ask your tax advisor. (decrease cash, decrease Owner’s equity, or increase Due from owner) Company credit cards used for personal purposes o Same guidelines as above, but (increase credit card payable rather than decreasing Cash) Physical assets transferred out of the business (e.g., computers, tools, vehicles, property) o Removing assets from the company may have various tax implications. Check with your tax advisor… you may choose to just ask them to make the appropriate entries. Here’s what they’ll likely do: (decrease asset balance, decrease related accumulated depreciation, increase receivable from owner, or decrease loan payable to owner, or decrease owner’s equity)
Don’t forget…
Legalities (e.g., formal notes, interest arrangements, etc.) From my first tax professor: o The “big pig” story
In Summary
Owners have the right to add funds to a company, and remove funds from a company – but there are certain accounting and legal conventions that provide guidance regarding how those transactions should be handled and recorded. Additionally there are tax implications when the owner starts moving funds into and out of a company. So try to think of the owner as “someone who’s separate from the company” – with some special privileges and some special rules. Reminder: In a state or IRS audit situation, owner‐related transactions will come under close scrutiny, so “squeaky clean” is the best place to be!
© Info Plus Accounting (may not be used or re-printed without permission)
Page 4
