Since 80% of all entrepreneurs are going to mix personal finances and business finances, Edmonton bookkeeping says that all entrepreneurs need to learn how to keep track of all personal expenses in and out of their corporation in their shareholder’s loan account. This is extremely important because this can help an entrepreneur minimize the taxes that they pay on money they take out of their business.
All of the various transactions that Edmonton bookkeeping says that entrepreneurs need to keep track in their corporation, or any transactions where an entrepreneur uses business money to pay for personal expenses or uses personal money to pay for business expenses. For example, an entrepreneur uses their company debit card or credit card to pay for meals or groceries, or even if they use their business debit card to take cash out of a bank machine to use for personal uses. Also, if an entrepreneur uses their personal credit card in order to pay an invoice of the business, or even if they have done something like taking money out of their RRSP in order to meet payroll. All of these things need to be accounted for very carefully in the shareholder loan account of the business.
The shareholder loan account of the business is set up in the financial statements of the business, on the liability section of their balance sheet. All personal money in and out is tracked here, and at the end of the year, at their fiscal year-end, Edmonton bookkeeping says that entrepreneurs will calculate how much money they have taken out of their business against how much money they have put in. If they have put more money into their business, they can take that money out tax-free. However, if they have taken more money out of their business, they have two options. They can pay back that money to their corporation, or they can claim it as income and pay taxes on it.
Some entrepreneurs believe that they can just simply leave the amounts that they owe their business in the shareholder’s loan account for an additional year. Edmonton bookkeeping says that that is possible, but it is not advised. The reason is, once that amount sits in their shareholder’s loan account for a certain period of time, Canada revenue agency considers it a long-term liability and requires an entrepreneur to pay interest to their business for that loan. Since entrepreneurs and their corporations are technically and legally considered separate entities for tax purposes, this is possible. Instead of facing potential penalties in additional interest charges, an entrepreneur is far better off to claim it as income, so that they can pay taxes and then clear the amount that is in their shareholder’s loan account.
When entrepreneurs keep very good track of the amounts that they are spending in their business for personal use and personal expenses in their business, they can ensure that they are paying taxes on exactly the right amount of money that they have taken out of their business, and no more.
Edmonton Bookkeeping | Tracking Expenses In A Shareholders Loan Account
Although it is the most advisable thing for entrepreneurs to avoid having any personal transactions into or out of their corporation says Edmonton bookkeeping, while it is often unavoidable, and over 80% of all entrepreneurs to do this. Therefore, businesses need to understand that they should keep track of it carefully, because all of the amounts that they have taken out of their business at the end of the year, needs to have income tax paid on it.
Edmonton bookkeeping says that entrepreneurs need to have their accountant review their personal and business taxes so that accountants can come up with the best strategy for how to claim the money that they have taken out of their business. It is going to be through salary, dividends, or a mixture of the two. Edmonton bookkeeping says in fact, it is most often a mixture. The most efficient tax strategies are rarely 100% salary or 100% dividends.
Business owners should get prepared to answer a lot of questions from their accountant based on their business and personal circumstances to help make the determination of how they should pay income taxes on the amount of taken out of their business. Since the business and personal circumstances can change regularly, entrepreneurs cannot just assume that they sit down with their accountant last year. The going to ask questions about how many dependence they have, if they have significant others if those significant others have income that is being brought into the household if an entrepreneur is the sole income provider and if they depend on the money in order to support their family, also if they have business partners that own shares in their corporation and if the entrepreneur is planning on selling their business in the next few years. When an accountant has all the right information about their business and personal circumstances they can come up with the most efficient tax strategy.
Entrepreneurs need to understand that a dividend is an amount that the company has profited in the last year in order to disburse that money. The dividends of the business show up on the balance sheet instead of the income statement and do not negatively impact the bottom line of the business says Edmonton bookkeeping.
Salary on the other hand, is considered an expense of the business, and it does decrease the bottom line. If an entrepreneur is planning on selling their business in the next few years, and ten bookkeeping recommends minimizing the amount of salary that they take, so that the profit of their business looks very positive to potential investors. Also, when entrepreneurs take salary out of their business, they should understand that all typical source deductions will need to be deducted as well. That means income tax, CPP and EI must be paid from the corporation if an entrepreneur claims they have taken a salary.
When entrepreneurs take money out of their corporation, coming up with an effective tax strategy on how they are going to claim money on their income taxes can help save additional money in taxes, and needs to be a strategy that they work on with their accountant.