Keeping track of all of the amounts that entrepreneurs have taken out of their corporation is extremely important says Edmonton bookkeeping. 80% of all entrepreneurs eventually take money out of their business for personal use or put their own money into their business. While it is considered best practices for all entrepreneurs to avoid all personal transactions into and out of their corporation, it is very common, and often unavoidable. In order to help keep track of all expenditures, business owners should be aware of what shareholders loan account is, so that they can easily and efficiently keep track of all of the money that has been used personally in their business.
Edmonton bookkeeping says that a shareholder’s loan account is an account that is set up on the balance sheet of the business under liabilities. This is where all of the various transactions that an entrepreneur has made personally into and out of their business need to be noted. A variety of transactions that need to be considered can include things like if an entrepreneur has taken money out of a bank machine but there corporate debit card, or if they have used their corporate credit cards to pay for gifts or meals for themselves. Also, entrepreneurs should count things like using their personal credit card in order to pay corporate invoices, or if they have had to take money out of their savings in order to meet payroll, or an asset purchase.
The reason why it is so important to keep track of, is because Edmonton bookkeeping says that at the end of their fiscal year, all of the money that they have taken out of their business for personal use, is subtracted from the amount of money that they have put into their business. If they have taken more money out then put back into their business, entrepreneurs either need to pay that money back to their corporation or more commonly they have to claim that money is income on their personal tax return.
When an entrepreneur declares that money as income, they reset the shareholder loan account back to zero. Many entrepreneurs believe that they can simply leave that amount that they owe their corporation in the shareholder’s loan account. This is not something that entrepreneurs should do for many reasons. First reason is since corporations and their business owners are considered separate entities for legal purposes, if an entrepreneur owes the corporation for longer than a year, CRA will count that as a long-term liability. They may get assessed at having to pay interest on that loan that they have taken from their business. Edmonton bookkeeping says that this can end up costing an entrepreneur high-interest rates as well as penalties. It is much better for an entrepreneur to simply pay the taxes that they owe on it and reset their shareholder loan back to zero.
By keeping good track of all of the shareholder’s loan transactions that they have made in their business, entrepreneurs can end up with a clear picture of how much money they have taken out of their business so that they can come up with an efficient tax plan.
Edmonton Bookkeeping | Ways To Keep Track Of Shareholders Loan Accounts
Once an entrepreneur has determined that they have taken more money out of their business then they have put in says Edmonton bookkeeping, they need to come up with an effective strategy on how to claim that money on their income taxes. The way they claim that money on their tax return can significantly minimize how much taxes they have to end up paying.
By sitting down with their accountant at their fiscal year-end, can help an entrepreneur and their accountant come up with the best tax strategy. Their accountant is going to have to consider several personal and business factors to figure out what the best split should be. Edmonton bookkeeping says that it is rarely a good tax strategy to pay hundred percent of taxes in salary or 100% in dividends, and is more likely a mix of the two dependent on several factors. An accountant will ask about the number of dependents, spouses, number of income streams coming into the household, if they are planning on selling the business, and if they have business partners. All of these things will help figure out the best tax strategy.
one of the biggest reasons why there needs to be a strategy is because salary and dividends have very different tax implications attached to them. Edmonton bookkeeping says that a dividend for example is the profits of a business that are distributed. This is treated very differently than salary which is considered an expense of the business. Since it is the amount that an entrepreneur has earned, as long as they earned a profit of as much as they’re trying to claim, that will work. If they have not made that much in dividends, they will not be able to claim it as income.
On the other hand, salary is the most common way for entrepreneurs to claim their shareholders’ loan account, however, because it is seen as an expense of the business, it is also seen as negatively impacting the bottom line. That can be detrimental if an entrepreneur is planning on selling the business, and wants to ensure that the entrepreneur has the best profit possible. Edmonton bookkeeping says that if an entrepreneur is claiming salary, they also need to keep in mind that they will also need to pay the proper source deductions on that entire amount. That means employer and employee CPP contributions, EI and income tax.
When entrepreneurs have the best tax strategy on the money that they taken out of their business, they can continue to pay minimal amounts of taxes, while allowing to keep the money that they have taken out of their business. This is extremely beneficial and needs to be done in conjunction with a great accountant.