It is very important for entrepreneurs to learn how to keep track of all of the money that they use in their business personally says Edmonton bookkeeping. Not only do they need to keep track of money that they have used personally, but they also need to keep track of money that they have personally put into their business. This is all tracked and what is called a shareholders loan account. It is very important that entrepreneurs keep track of all of these transactions so that they can calculate at the end of their fiscal year how much money they have taken out of their corporation in order to pay taxes on it.
There is a variety of transactions that entrepreneurs should count in their shareholder’s loans including using their business bank card to take money out of an ATM, using their business credit card or debit card to pay for meals in restaurants for personal use, or groceries for example. Other examples of transactions that need to be calculated include if an entrepreneur has used their personal credit cards to pay an invoice for the corporation, or if they have done something like taking money out of their RRSPs in order to pay their staff.
At the end of the year, Edmonton bookkeeping will calculate how much money an entrepreneur has taken out of their business after all the amounts that leave put into their business have been deducted from that amount. All of the remaining money that they have taken out of their business, needs to be claimed as income on their tax return.
Many entrepreneurs believe that it is possible that they can leave that money in their shareholders’ loan account for the next year. Edmonton bookkeeping recommends entrepreneurs do not do this because once it stays in their account for a year, Canada revenue agency considers it a long-term liability. That means, that the entrepreneur should be paying their corporation interest on that loan. They can get in interest clawback, and have to pay all of the interest that they owe including additional interest and penalties. In order to avoid these additional interest charges and penalties, entrepreneurs should instead, just claim the amount on their income tax, and clear the amount of their shareholder loan account back to zero.
It is important that entrepreneurs realize that shareholders’ loan accounts is only necessary for businesses that are incorporated. Proprietorships do not need to keep track of their shareholder’s amounts, instead, they just have to keep track of all of the money that they have taken out of their business so that they can claim it on their income tax as income.
Entrepreneurs understand how important it is to keep track of all of the personal expenses and payments in their corporation, they will keep better track of their shareholder’s loan, in order to be able to properly pay the taxes on the amount that they owe.
Edmonton Bookkeeping | Understanding How To Track Shareholders Loan Accounts
Since 80% of all entrepreneurs use the finances of their business for personal reasons, as well as use their own personal funds in order to pay business expenses says Edmonton bookkeeping. Because of this, entrepreneurs need to learn how to keep track of all of their transactions in the shareholders’ loan account.
At the end of their year, if an entrepreneur ends up having money that they have taken out of their business in a greater excess than money they put into their business, that is money that they either go back to their business or that they can simply claim that they have taken out of their business as income on their year-end personal tax return. Edmonton bookkeeping says that business owners can either claim salary, dividends or a mix of the two as the way they have taken money out of their business.
When sitting down with their accountant, they need to ensure that the accountant understands their business and personal situation, so they can make the best tax plan for the entrepreneur. Bill takes into account a number of factors including if they are planning on selling the business in the next few years if they have additional income coming into their household as well as if they have any business partners in their corporation or if they are the sole owner. Since many of these situations could change from year to year, entrepreneurs need to ensure that they are meeting with their accountant every year.
Edmonton bookkeeping says that because of how salaries and dividends are treated financially, entrepreneurs need to understand the difference between the two. The dividend of the business is the amount that their corporation has declared as profits. The dividends will show up on the balance sheet of a business is an asset instead of a liability on the income statement. Entrepreneurs who claim money from their business as a dividend will pay personal tax on the amount.
When entrepreneurs claim the amount that they have taken out of their business as salary, it is very important that they are aware that they also need to pay the appropriate source deductions on that amount as well. That means in addition to income tax, EI as well as employee and employer contributions to CPP, that has to come out of the business finances after an entrepreneur has claimed they have taken a salary. It is also important for entrepreneurs to be aware that the salary is considered an expense of the business, and impacts the bottom line negatively. If an entrepreneur is planning on selling their business in the next couple of years, they may choose to minimize the amount of salary that they are planning on claiming, so that the profit can look as positive to potential investors.
Coming up with an efficient tax strategy on the money that they have taken out of their business is very important and along with their accountant, can help entrepreneurs figure out the most advantageous way to claim that money, to minimize the taxes that they have to pay on it.