Today TaxMama hears from Kennet in the TaxQuips Forum, who has this issue. “I incorporated my HVAC company from a sole proprietorship (c-corp) six months ago. I was told that I could temporarily borrow the income coming in from the company to pay my bills – and that I could create a payroll later. Long story short, I still haven’t created the payroll yet. How do I do handle the taxes for the moneys borrowed?”
First of all, congratulations on your cool new corporation. But, to ensure the success of a corporation, it really helps to have a tax professional on your team. Your tax pro can do more than just help you keep an eye on proper procedure. Your tax pro can also help you grow your business and keep costs and penalties under control.
In fact, I just had a thought, re-reading your question…when you incorporated your old company, did you open a new bank account and start your books all over again?
It’s important to understand that you really need to operate the corporation correctly, or you’ve wasted the purpose of incorporating. By treating the corporation funds as your own personal bank account, anyone who sues you can easily pierce the veil of the corporation and go after your personal assets. So, this casual, personal use of the funds is not just an accounting or tax issue, it could potentially reach into your own personal pocket.
In your case, you have a number of options:
1) You can write a formal note (loan) to address your borrowing, showing a proper interest rate and repayment terms – and do pay the interest each year! Also, be sure to record this decision in the corporate minute book.
2) You can treat the funds as advances from payroll – and then set up the payroll immediately, and start deducting your previous advances. Be sure you set the payment schedule so you zero out all the earlier advances before the end of the year.
3) You can just pay back the loan, again, with interest – preferably before the end of the year. Then start your payroll now, and take checks on a regular schedule.
This early in the life of your corporation, this won’t be difficult to straighten out. So, don’t worry. But do get a tax pro on your team and meet with him or her at least once a quarter. It really will be blessing for your business.
And remember, you can find answers to all kinds of questions about corporate payroll and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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