Entrepreneurs can significantly impact the amount of taxes that they have to pay on money that they have taken out of their business says Edmonton bookkeeping by learning how to keep track of all the amounts that they have taken out of their business very carefully in shareholder loan accounts. Not only should they keep track of all of the amounts that they have taken out of their business, but any time they put money into their business from their personal funds to pay for business expenses, can be counted here too.
It is very important that entrepreneurs keep track of all of the different transactions in and out of their business for personal purposes says Edmonton bookkeeping. The reason is, because at the end of the year, when an entrepreneur reaches their fiscal year end, they will calculate how much money they have taken out of their business removed from the amount of money that they have put into their business. If they have withdrawn more money than they have contributed, that means there shareholder loan account is overdrawn and entrepreneurs need to declare it as salary, or dividends. In order for an entrepreneur to take earnings out of their company the company must also be making money.
If an entrepreneur ends up putting more money into their bank than they have taken out says Edmonton bookkeeping, then they are allowed to take that surplus out at any time tax free. Entrepreneurs can use this strategically to help take out of money of the business strategically.
Some entrepreneurs believe that it is going to be efficient tax strategy to leave the money in their shareholders loan account. This is possible but it is not recommended. The reason is, since the corporation is considered a separate legal entity with its own tax rules, the amount of money that the entrepreneur owes that entity, can be considered a liability on the business, and Canada revenue agency can therefore have an entrepreneur pay all of the interest that they owe on that liability. This can much more negatively impacting entrepreneur then if they had just pay taxes on it in the first place.
Once entrepreneurs learn how to keep track of all of their shareholder loan amounts, very carefully, they can ensure that at the end of their year, they can have an efficient tax plan with their Edmonton bookkeeping company as well as their accountant. They can figure out the best tax strategy on the amounts that they have taken out, utilizing a mix of salary as well as dividends in their corporation. By learning how to do this, entrepreneurs can minimize the amount of money that they end up owing because of their shareholder loan accounts, and the more stringently they keep track of this amount, the better they can ensure all of the amounts are accounted for. When entrepreneurs do this, they can significantly impact not only their business, but their personal finances with an efficient tax strategy.
Edmonton Bookkeeping | How To Account For Shareholder Loans
At the end of their fiscal year end, Edmonton bookkeeping says that if entrepreneurs have taken more money out of their business than they have put into it, they need to come up with an efficient and effective tax strategy alongside their accountant says Edmonton bookkeeping. The most efficient tax strategy is a mixture of salary and dividends. However, entrepreneurs need to keep in mind that if they are taking earnings of their business, the business must actually be earning money in order to do that.
By sitting down with their accountant and Edmonton bookkeeping company, entrepreneurs can find out what the most efficient strategy is for their business and for them personally. Their accountant will ask questions to figure out their personal situation as well as taking into account the businesses situation as well. Since this can change on a year-to-year basis, entrepreneurs should be ensuring they are meeting with their accountant on a regular basis. The accountant will ask questions such as how many dependence they have, do they have spouses, how many revenue streams to they have coming in their house, is this their only source of income and are they depending on it to support their family. They will also take into consideration factors like are they the sole owner of the corporation, if they have business partners what percentage of shares do they own.
When entrepreneurs are working with their accountant to come up with an efficient tax payment strategy, they need to understand what dividends and salaries are. The dividend is the earnings of the company. It is how businesses distribute the profit that they make in their company. Edmonton bookkeeping says that in order to take money in dividends, an entrepreneurís corporation needs to actually be making a profit. If an entrepreneur is not able to make a profit in their corporation, they are not going to be able to take a mixture of salary and dividends.
For the salary of the business, entrepreneurs need to understand that it is considered an expense of the business, and therefore it decreases the bottom line, and negatively impacts what the profit looks like on paper. If an entrepreneur is planning on selling the business within the next few years, they should avoid taking lots of salary, because it can change how the profit looks to potential buyers. Entrepreneurs also need to understand that if they claim salary, there are also going to need to to pay source deductions on that amount as they would if they were an employee. Source deductions include paying employer and employee contributions to CPP, EI, and income taxes. If an entrepreneur claims that amount is salary, they are going to also need to pay Canada revenue agency that amount in additional taxes, or else get penalized.
Coming up with an efficient tax strategy will take work on behalf of the entrepreneur and the accountant, but is very important in order to clear that shareholder loan down to zero and limits the entrepreneurs liability in their business.