The reason why it is so vitally important for all entrepreneurs to keep very good track of all of the amount of money that they have not only taken out of their business but also put into their business says Edmonton bookkeeping, is because if they take more money out of their business then put into it, they need to pay taxes on that amount. This is called a shareholders loan, and 80% of all small businesses use their personal finances in order to fund business purchases and expenses. Therefore, 80% of businesses need to learn this. The better they keep track of the money that they spend as well as put back in their business, the better idea they will have at the end of the year how much money they need to claim as income on their personal tax refund.
Business owners should consider all transactions that involve their personal finances as a shareholder transaction. Whether this is money that they have taken out of their business or put into it. For example, Edmonton bookkeeping says that if an entrepreneur takes cash out of the bank machine from their business bank card for personal use, if they use their company credit card to pay for meals or groceries, or if they use their business debit card in order to buy a gift. All of these things count towards their shareholder’s loan account. They need to keep receipts, and write notes on the receipts on what they did with that money. Other transactions that count towards their shareholder loan account is if they have taken personal money in order to pay business expenses, such as using their personal credit card to pay a business bill, or they have taken money out of their RRSP in order to cover payroll.
The shareholder loan account is where all of these transactions are kept track of. The shareholders’ loan is set up in the liability section of their balance sheet and is designed to keep track of all of these transactions by their accountant. At the end of their fiscal year, Edmonton bookkeeping says that they must subtract the amount of money that they have taken out of their business from the money that they have put into their business. If they have taken more money out of their business then put into it, they either need to pay that money back to the corporation, or they need to claim it as income. Since most entrepreneurs cannot afford to pay that money back, their option is to claim it as income.
Many entrepreneurs believe that they can leave the money in their shareholder’s loan account for the next year, and hopes that they put more money back into their business then they take out of it. While this is possible, it is not advised says Edmonton bookkeeping because since entrepreneurs and corporations are considered separate entities, Canada revenue agency may penalize entrepreneurs for having an interest-free loan from their business, and be ordered to pay interest dating back to the first transaction.
Edmonton Bookkeeping | How To Track Shareholders Loan Account
When entrepreneurs use personal transactions in and out of their bank account, they end up keeping track of it in what is called a shareholders loan account says Edmonton bookkeeping. While it is the best practice of all for entrepreneurs to avoid making any personal transactions both into and out of their corporation, 80% of all entrepreneurs do this. Therefore, rather than telling entrepreneurs they should not do it, because they do, business owners just need to know how to deal with it properly.
If at the end of the year, entrepreneurs have found that they have taken more money out of their business then put into it, they need to figure out along with their accountant how the best way to claim that as income on their taxes as possible. Edmonton bookkeeping says that there are two different methods, either through salary or dividends. Usually, accountants will figure out the most tax advantageous mix of salary and dividends. The best tax mix usually is not 100% salary or 100% dividends, but a combination of the two depending on the personal situation of the entrepreneur, and the business.
Edmonton bookkeeping says that entrepreneurs should be prepared to answer a variety of questions from their accountant in order to determine the best mix tax-wise. Since an entrepreneur’s situation, as well as the situation of their business, may change from year to year, this is important that business owners have this discussion with their accountant every single year. They will ask questions such as is the entrepreneur planning on selling the business in the next couple of years, are they the sole shareholder, or do they have partners. If so, what percentage of shares do they own. Our they depending on the money from the corporation to support their family? Did they have any other income coming into their household? All of these questions are going to help an accountant figure out the best way to claim the money on their taxes what percentage of salary what percentage as dividends.
There is many differences between salary and dividends, that necessitate a strategy. A dividend says Edmonton bookkeeping is the amounts that the company declares as profits and therefore is able to distribute as earnings. They show up on the balance sheet as an asset instead of negatively on the income statement. While this is very beneficial to claim, business owners also take personal taxes on that, as well in order for this strategy to work, business owners need to have that amount as profit in their business.
Edmonton bookkeeping says that salary, on the other hand, is considered an expense of the business and as such, decreases the profit of the business because it negatively impacts the bottom line. In addition to that, entrepreneurs also need to pay the appropriate source deductions on the amount that they take as a salary. That includes income tax, CPP and EI.
When entrepreneurs take money out of their business for personal reasons, it leads them to having to make a decision on the best way to claim they have taken that money on their income tax return, so that they can pay minimal amounts of taxes possible.