What Your CPA Wants You to Know
A podcast for entrepreneurs! We are a husband and wife team running our CPA firm together. We know just how difficult it can be to take your business dream to a reality. Our mission for this podcast is to guide, empower, and educate entrepreneurs in an easy-to-understand way! We want business owners to have the information that they need when they need it, AND without the hefty accounting invoices from a CPA! Follow along for practical advice, tips, and tricks from a CPA who knows what it is like to run a business, and strategies to keep your business thriving from an MBA! We will also show you how to run a business while keeping your family and sanity intact along the way!
What are you waiting for???
What Your CPA Wants You to Know
85. Owner Distributions & What All Business Owners Must Know About Them!
Confused about transferring money from your business to personal accounts? Whether you run a partnership, S-corp, sole proprietorship, or partnership, we'll guide you through owner distributions and explain why these transfers aren't classified as expenses.
This episode is a must-listen for business owners confused on how to account for owner distributions and how they work! Tune in and empower yourself with the knowledge to tackle owner distributions head-on.
Create a STAN Store - Click here to try it out!
Here's where you can find us! Follow along on Instagram for lots of free content for business owners daily!
Shop our business guides!
Our Instagram Page
Our family page
all of a sudden, if you took $100,000 distribution, I'm going to be telling you that you have $100,000 more in profit than you thought you did.
Speaker 2:And you might be a little angry with me, but Because it's adding it as an expense and it is not an expense when you take money out of your business.
Speaker 1:Right Welcome to what your CPA Wants you To Know.
Speaker 2:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.
Speaker 1:I'm Carson Sands.
Speaker 2:And I'm Taryn Sands.
Speaker 1:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 2:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 1:We're here to share everything your CPA wants you to know.
Speaker 2:In a fun and easy to understand way.
Speaker 1:Let's get started.
Speaker 2:Let's do it. So today we're going to talk about a very, very exciting subject that we see a lot of people make mistakes on, and, though it may not be super fun to learn about it, it is very important, and I think we've seen this pop up so many times lately that we both knew that there needed to be an episode about it, and that is all about owner distributions.
Speaker 1:This is an important one, because a lot of people don't take money out of their business. They leave it in there thinking that you know I'm going to need that money. I want to keep reinvesting it back into the business. And then they wonder how they could possibly owe taxes whenever they didn't actually take any money out of the business.
Speaker 2:Yes, and that came up a lot this tax season and people just confused when? When is the money getting taxed? How do I account for an owner distribution? What exactly is it? Does it have to be a transfer? You know All of these different questions. So that's why we knew we needed an episode on that, and we're going to start with the basics and then we'll explain all of these questions and how it applies to your accounting for your business.
Speaker 1:Now to be clear this applies to partnerships, s-corps and single member LLCs, along with just sole proprietorship businesses. This does not apply to C-Corps. I just wanted to put that out there.
Speaker 2:Which almost no one is still having a C-Corp right now, at least people that we work with, but some people do very few Right. So first off, let's just break it down. What exactly is an owner distribution?
Speaker 1:if you're listening and you don't know exactly what we're talking about, Distribution just means that you take money out of the business account and somehow put it into your personal account. That can be writing yourself a check from the business. It can be transferring the money from your business account to your personal bank account just directly online. There's a lot of ways that you can do that, but you move money from the business account to your personal account and that's a distribution.
Speaker 2:So that's the first kind of confusion is well, I transferred money from my business account to my personal account. Is that a distribution? Yes. Or I wrote myself a check to get some cash out of the bank account. Is that a distribution? Yes?
Speaker 1:Now for an S-corp. There are other ways you can get money out of the business and into your personal account, because S-corp owners also have to pay themselves a salary. That's not what we're talking about today. That's usually a pretty clear distinction, because that money is on a paycheck. You pay payroll taxes on it quarterly or monthly and you would have a W-2 for that. This is other money that you take out of your company through a distribution.
Speaker 2:Yeah, so definitely not payroll, but anything else you take out. Also, we see this a lot and this happens in our business too. Let's say I went to the movies and I accidentally used the business account. I use that debit card instead of my personal card when we're going through the bookkeeping and Carson sees like, oh, I use it at the movie theater, he's going to mark that as an owner distribution because that is not a taxable expense for our business and it just accidentally got in there. So that's just us taking money out of the account, even though it wasn't a transfer, it wasn't a check. It's still an owner distribution when we're accounting for it.
Speaker 1:Right, and there's no rules against doing that. It's just we advise people not to, because it's a lot cleaner and easier to keep everything separate for purposes of accounting and keeping the books. But it does happen. You pull out the wrong card or you only have the business card for some reason and you just have to get something. Right now and it's not business related. Just make sure to mark it as a distribution in your books and then you haven't done anything wrong.
Speaker 2:It basically means that you took money out of the business. That's right Money. That was not for a specific expense. It literally was just for you to use that money.
Speaker 1:So the next question people have on this is is that taxable? Not exactly. So. The money that you make in your business is taxable to you, whether you take the money out of the business account or leave it in there, and so taking these distributions is great for a lot of reasons. First of all, you're already being taxed on the money as if you did earn it, and so you might as well take it out of the business and have use of it for personal use. Taking that distribution also protects that money from liability if you're in an LLC or a corporation of some sort. But no, it's not taxable. It doesn't change your taxes at all if you make that distribution from your business to your personal account.
Speaker 2:I think that is where lots of people are confused because they're not really looking at it from, I guess, like a tax standpoint. But it just makes sense because if you made $100,000 in profit that year, when you file that return you're paying taxes on that profit. They don't really care if the money's sitting in the business account still or you took it out You're still going to pay your taxes on that profit.
Speaker 1:Right, and if you think about it, it makes sense, because S-Corps and partnerships don't pay taxes. They're what's called conduit entities or a flow-through entity, just meaning that the profits from that company flow through to your personal tax return and that's where the taxes are reported. If you only paid taxes when you pulled money out well, the IRS is wise to you on that that would be a neat trick, right? Like hey, I'll just never take money out of my company and then I'll never have to pay taxes. But that wouldn't work. So you do get taxed on the income immediately when you earn it, whether you leave it in the business account or not. Now, likewise, that distribution to your personal account is not a deduction for the business, it's not income to you personally, but it's not a deduction or an expense on the business tax return.
Speaker 2:And that is another thing. We see a lot with accounting. So what the heck? How do you correctly account for these owner distributions If you know what they are now like? What exactly do you do with them when you see them pop up on your bookkeeping?
Speaker 1:That's a great question and this is why I don't care what you call them. What you call the distributions is fine, but I'm going to tell you the different terms that are used, and it's not because I care which ones you use, but because you'll see different terminology used on QuickBooks depending on whether you set it up as a sole proprietorship, an LLC, an S-corp or a partnership. You might see these distributions called different things. All of these terms mean the exact same thing, and so here they are Shareholder distribution, partner distribution distribution, member disbursement, members draw owners. Draw owners pay in personal expense. You'll see that one a lot on QuickBooks. I actually hate that last one because it's very confusing and the confusion we were just talking about about how that's not really pay to you, that's taxable income. It really confuses people whenever they use that terminology. But nevertheless, I wanted to point that one out because you will see that if you set up your QuickBooks file as a sole proprietorship, a lot of times you'll see it called owner's pay and personal expense. Again, that's just a distribution.
Speaker 2:And whenever you're using QuickBooks, you obviously want to make sure these distributions go into the right category, because then that can mess up your books completely. So what do you see people do, and how does that affect their financial statements when they make that mistake?
Speaker 1:Well, if they try to run it through the profit and loss, it makes it look like they made a lot less money than they did, which of course when we go fix it the books, all of a sudden you're you know, if you took a hundred thousand dollar distribution, I'm going to be telling you that you have a hundred thousand more in profit than you thought you did.
Speaker 2:And you might be a little angry with me, but because it it's adding it as an expense and it is not an expense when you take money out of your business.
Speaker 1:Right, and so in QuickBooks or in any bookkeeping software, there's five types of accounts that can even exist. Every single category of transaction goes into one of these Income, expense, asset, liability and equity and you don't have to remember all that, but it is important to know those five, just so you'll know that distributions are an equity type of account, so they don't go into the expense category. The only other thing that you'll really see in the equity that you can really have any influence over anyway is contributions, and we did want to mention those briefly as well. They're very similar to distributions, except it's when you put money into your company. This happens sometimes.
Speaker 1:If you don't have enough money in there and you need to buy something, you can put personal funds into the business and then buy the asset out of the business. That's the best way to do it. Anyway, that's called a contribution. That's also an equity type of account and, just like the distributions, it doesn't really change your taxes. It's not income to the business and it's not deductible by the owner. It's just putting money into the business.
Speaker 2:When we first started our business in 2016, there were so many things that I knew we needed to get set up. We needed to build an email list, we needed a website, we needed ways to set appointments with our clients, and it seemed very overwhelming, especially for someone like me who is not very tech savvy. We stumbled our way through all of this and did a little bit here and there, and it was a very long and complicated process. But just recently we found out about something called a stand store, and it is a all-in-one business tool that gives you everything that you need to start, and I wish we would have had this sooner. This would have made things so simple from the beginning. Stanstore will build your email list for you. You can also upload a digital product webinar or any other training that you have for clients or potential clients. You can do email marketing, create memberships so many things with StanStore. Stanstore is incredibly easy to run. I got a product on there within about 15 minutes and set it up. You can accept payments through there. It really is an all-in-one software that makes it easy for business owners to sell digital products, have a website, have various links in there and do it very easily. You don't have to hire someone to create a stand store. If you want to check it out, they do offer a 14 day free trial and I will put the link in the show notes for you to check it out. I promise you, if you use it once, you're going to love it.
Speaker 2:Now back to the show.
Speaker 2:To sum it up, where we see people struggle with this is that you can take as much money out of your business as you would like.
Speaker 2:If you, if you say that you need, let's say, ten thousand dollars to run your business on a monthly basis and you feel comfortable having like 30,000 and it's getting really high, like it's getting to 50, you can take that out whenever you want.
Speaker 2:Just make sure that when you're doing your accounting, that you are accounting for it properly so that it doesn't look like it's an expense in your business, because we do see that a lot. And then, whenever you are getting your items together for your tax return for your CPA, if you're not using QuickBooks, we kind of already talked about what happens if you mistakenly put that into the wrong category in QuickBooks. But if you're not using QuickBooks, make sure that you have a line item and let them know what your owner distributions were or your owner contributions were for the year, so that it's clear what was taken out and that it's not in some sort of weird category, because they actually do need to know what was taken out and you can track those separately so you might have a list of what you spent advertising, contract, labor, all of those things you can have just a line item of. Here's what I took out as owner distributions.
Speaker 1:Right. Even though they aren't directly going to affect your income or expense for the year, they are important. We do track them for other purposes that I won't get into because they're boring and complicated, but just know that they are important. So make sure to let us know exactly what that amount is.
Speaker 2:Exactly. Hopefully this episode helps you clear up how to present that when you're doing your tax return, so that your tax return is accurate, but also makes you realize what those are and that you can take that extra money out of your account and you're not going to be taxed on it right then, and how the taxes work on that. So hopefully now you know.
Speaker 1:Well, until next time. Thank you for listening to.
Speaker 2:What your CPA Wants you to.
Speaker 1:Know Podcast. This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.