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    10 Replies Latest reply on Oct 29, 2012 1:06 PM by Moderator Berta

    Expenses before starting the business. How to account, how to recover.

    chuckbeattie Wayfarer

      I have made several purchase like registering and hosting a websites. Some expenses associated with the design etc. about $588.00

       

      I created a Capitol Account as an Equity and entered these expenses against this account.. Is there a way for me to take this money out of the business.

      I have also created a Capital Account to track Owner Investement(cash) which was deposited into the checking account.

       

      What accounting steps do I take to reimburse myself for those expenses. I do not want this to be a draw.

       

       

      thanks,

       

      chuck

        • Re: Expenses before starting the business. How to account, how to recover.
          LUCKIEST Guide

          Welcome Chuck

           

          Go to "Profile" and share some more. What kind of business?? Where are you located??

           

          The simple answer to your question about recovering expenses is for you to write a check to yourself.

           

          the smarter way is to retain an accountant. Yes it will cost you NOW, BUT save you lots in the future.

           

          Good luck, LUCKIEST

          • Re: Expenses before starting the business. How to account, how to recover.
            Tran Nguyen Tracker

            Hey Chuck:

             

            I need a little clarification. Are you trying to recoup the $588.00 that you put into your company?

             

            Because if your website cost a total of $588.00 that isn't considered equity -- anyway, you can be taxed on equity.

             

            If your company is just starting up, then all the money you are putting into from the beginning until now (that is your own personal money) should be considered Owner's Investment -- Other Current Liabilities.

            There are several reasons for this:

            1. Owner's Investment/Capital Investment is non-taxable

            2. You can recoup the money without paying tax on it

            3. It doesn't make it look like your company is generating "income" from you simply putting money into it -- thus, not taxable

             

            To gain this money back, you need to "pay yourself" when you have a steady cash flow. In most accounting software, "You, the owner" would be a vendor. The account that is being deducted is "Owner's Investment"

             

            Thus, you can recoup the money you invested without paying tax on it as well.

             

            Let me know if you have any addition questions.

            • Re: Expenses before starting the business. How to account, how to recover.
              Moderator Berta Guide

              Hi Chuck & welcome to the community!

               

              I would have to agree with Luckiest. I think investing in an accountant to help handle the accounting & make sure it's all done properly from the start would be a wise investment in the long run. It may end up costing you loads more if you make an error & have to hire an accountant later to fix mistakes that were unknowingly made.

               

              Wish you the best in your endeavor.

               

              ~Berta

              • Re: Expenses before starting the business. How to account, how to recover.
                Uncle Leon Tracker

                Of course, invest in an accountant.  If you want to operate a business and you feel that you can't afford an accountant: - Stay Home.

                 

                Let me state that I'm not an accountant; nor do I play one on TV.  With that said, here's my recommendation concerning the question asked.

                 

                Treat any funds that you provide for the business as a "Loan" to the business from yourself.  When you wish to recover those funds, in whole, or in part; simply repay the loan.

                 

                Draw a regular salary.  If your business can't afford to pay you a salary, draw one anyhow. - Then lend the money back to your business as a loan.

                 

                That may seem like you're taking money from your left pocket and putting it into your right pocket.  but there's much more to it than that.

                 

                If you do as I recommend, your accounting will reflect exactly how much money you have invested in your business, and you'll know when you're really beginning to make a profit.

                 

                Any "Break-Even Analysis" needs to see this true picture in order to be realistic.

                • Re: Expenses before starting the business. How to account, how to recover.
                  Tran Nguyen Tracker

                  Leon,

                   

                  I'm going to have to disagree slightly on the draw.

                   

                  "Draws" are considered taxable and what you use to pay yourself. Depending on the company type, all draws are taxable. While this would show the company is making a profit or performing better, it would leave the business owner wide open to being tax for money he/she doesn't really have.

                   

                  It would also eliminate the ability to use the start-up business tax break that exists for the first few years of the company being opened.

                   

                  Tran Nguyen

                  Accountant

                  • Re: Expenses before starting the business. How to account, how to recover.
                    Guide

                    Hi Chcukbeattie,

                     

                    What kind of a company is it?  Are you a Corp., an LLC, Inc., Sole Proprietor?  That makes a HUGE difference in what you can and can not do. Definitely contact an accountant. Good luck.

                    1 of 1 people found this helpful
                    • Re: Expenses before starting the business. How to account, how to recover.
                      howtoformanllc Wayfarer

                      It is an easy reimbursement. Tran is correct when he states to write a check out to yourself and make sure it is documented for when the 15th comes around.

                      • Re: Expenses before starting the business. How to account, how to recover.
                        Stephen Hartfield, CPA Adventurer

                        Hi Chuck Beattie or anyone who is starting their own company:

                         

                        There is no easy answer the initial question of how to reimburse yourself. This will depend on what type of entity you are using for your business: Sole Proprietor, Partnership/LLC, S Corp, C Corp.. Each has its own particular rules regarding distributions and expense reimbursements.

                         

                        Start-Up Costs

                        When starting a business, the initial formation costs are known as Start-Up Expenses. This would include incorporation costs, attorney fees for agreements, trademarks, market investigation study costs, pre-opening advertising costs, etc. These costs are paid out of the bank account that the owner/stockholder sets up before any expenditures.

                         

                        Here is what it would look like from an accounting perspective:

                         

                        ENTRY No. 1

                        Debit: Cash $1,000

                        Credit: Owner's Equity/StockHolder's Equity/Member's Equity (you choose) $1,000

                         

                        To record initial capital contribution

                         

                        ENTRY NO. 2

                        Debit: Start Up Costs  $588.00

                        Credit: Cash $588.00

                         

                        For tax purposes the $588 could be written off in its entirety. See Publication 535, Business Expenses on www.irs.gov. for additional information on these types of costs.

                         

                        If I get a chance I will address some basics of distributing/repaying monies from various entities in another post.

                         

                        Just one point of clarification to Tran Nguyen's comment on September 13, 2012 about all draws being taxable. That is not necessarily the case. In general, assuming we are talking about a pass-thru entity such as an LLC  or S Corp,, you are taxed on the net taxable profit as transmitted on the K-1. It is quite possible to distribute funds in excess of profits (perhaps profit was not entirely distributed from the prior year) in a particular year and it not be taxable. This totally depends on the facts and circumstances of each case.

                         

                        The aforementioned is provided as general information and is not intended as tax or legal advice.

                         

                        Stephen R. Hartfield, CPA

                        www.debitsandcredits.com