How Communication Impacts Year-End Bookkeeping?

What do $12,000, lending company money and 3 LLC's have to do with one another? These are the examples that our resident Bookkeeping Mensch shares with us to demonstrate that communicating with your Bookkeeper all year is essential. 

Episode mentioned: 

• American Fast Food's Perception Problem, https://www.buzzsprout.com/2188873/episodes/15686396-american-fast-food-s-perception-problem

Transcript

Episode #45

Another October is upon us, and I’m thinking about ‘year-end’ already.  I’m gathering W-9 information from my clients for subcontractors who they have already paid, but shouldn’t have, without the W9 filled out, dated and signed.  I’m also, even more than usual, starting to prioritize the clients who get done first, since corporations and partnerships and aggressive, pushy clients pressure their tax preparers to get them filed first.  Then, on to the single member LLC’s and sole proprietorships, and even the C Corps since they file on April 15th. And because I am ramping it up in my office and starting to work a little faster and feeling some amount of pressure already, I will also have more client stories to share with you in upcoming episodes. However, since it’s time to think about the end of the year and closing your business books, there are things to start talking about. 

Before we start, remember to sign up for the Substack newsletter with the link in the episode notes, and the YouTube channel link is there too. I am not looking forward to the time change and winter and darkness coming soon --- Paul Rosenblum. 

This time of the year, I always go through balance sheet reports, even for single member LLC and Sole Proprietorships which don’t have to report the balance sheet as part of their income tax filings. However, if the balance sheet is incorrect, much of the time, the profit and loss would have a corresponding error since the two are interrelated. 

As a small business bookkeeper, I have many clients who are concentrating on running their businesses and unfortunately not remembering to communicate with their bookkeeper for their small business.  I will accept the downloaded transactions in QuickBooks online or manually enter bank statements in the desktop edition and unknowingly, sometimes, take a deposit, for an example, and enter it as a ‘sale’, rather than a transaction that belongs on the balance sheet such as a tax refund, or an insurance check that they had put in a claim for which would belong as ‘other income’ on the Profit and Loss.   I try to log in to the bank and actually look at the incoming check graphics of a check that got deposited, but sometimes it’s an electronic deposit and I book that deposit as a sale.  So, as I go through the balance sheet this time of the year, any balance that doesn’t look right, I will call or send email to the client and question them about it. I will also run a detailed report of all ‘revenue’ transactions and send to the client and have them confirm that they are all sales, and not something else that they forgot to tell me about.  

Recently, I had a situation where, as I went through the balance sheet, I saw a negative $12K in an account that originally was a loan from the mother of the owner of the business.  The loan was booked properly, and the payments were booked properly, but there were extra payments which made the balance go into a negative amount. I finally had my virtual meeting with the client (the first one in 5 months), and I questioned the owner about this loan from the mother.  She told me that yes, it was a loan, she paid it back, and then ended up lending her mother more money after the original loan was paid back.  I was never told this.

And why was this money coming from the business?  It should have been a draw, and then a personal – non business loan to the mother. 

3 things here that I want to talk about in terms of bookkeeping and taxes: 

1. A family member is allowed to give money in two different ways: 
   1.  A personal gift to a son or daughter running their business, (and in 2024 the threshold for paying zero tax on a personal ‘gift’ is $18,000.00. If the money is a personal gift, then it does not have to be paid back. This would be booked as an Equity contribution by the owner using personal money.
2. A family member can ‘lend’ money to the business, but the intent and the loan paperwork has to show a schedule of payments AND some amount of interest that would have to be paid by the business sometime during the loan payoff schedule.

In this case, there was no written agreement, no schedule of payments, and no interest paid. And of course, no communication with me on why the business paid more than what was owed (substantially more).  

In this case, the tax preparer doesn’t want to go back to 2022 and amend the tax return just because of this loan, but I do have to fix the balance sheet. What I will do (for now) is to show the loan as paid off, and (I’ll have to check with the tax preparer) maybe show interest paid in 2024, (which we could say was paid well after the loan was paid off) since there is already an ‘overpayment’ showing the books, and move the remaining money given to the owner’s mother as a personal draw in the Equity section. (Mom doesn’t have to pay that back to the business).  Still on the balance sheet, but at least it will be booked correctly. I’ve already read the riot act to the client (in a nice professional way of course), but I know that similar situations will happen again. The owner means well but is very busy and doesn’t communicate with me or her tax preparer the way she should.  

And that brings me to a related situation. One of the frequent questions that I get from clients is this:  

“Can I lend my LLC money like my friend who has an S Corporation does?  I think they use ‘Shareholder Loans’. “ 

And the answer is YES. Even if your LLC is a single member, 100% owned by you, similar to a sole proprietorship (which you can’t lend money to, by the way), you can still personally ‘lend’ money to your own LLC.  The same rules apply as to the above example. 

You need paperwork with the total amount that the loan to your company was, along with the payment schedule and the total interest that the LLC will pay you in total.  Because the LLC is a separate entity than your personal bank account, you are allowed to lend the LLC money personally.  Again, you can’t do that with a sole proprietorship.  

To go a little deeper into a situation like this: How do you handle two married people who between the two of them, own 3 businesses, all three of them single member LLC’s and one LLC helps fund another startup LLC?  In this case, the ‘funding’ money should be booked on the balance sheet of the company giving the money and booked on the balance sheet as incoming ‘startup’ money for the entity that is receiving that money.  We don’t know how much the total is going to be yet, so the tax preparer is going to wait and see on this.  Do we count this as a business to business loan, or do we book it as an Equity Draw in one company and ‘additional or startup capital’ to the company in need?  When it’s decided, I’ll keep you informed. So, as a business owner, it’s very important to tell your bookkeeper any ‘out of the ordinary’ financial transactions’ that you make as you make them. 

In an S Corporation, there is an account on the balance sheet called “Shareholder Loans”, and that is used for loans that the company makes to the shareholder, and loans that the shareholder makes to the company. That gets reported on a tax return to the IRS but is non-taxable.  

All of the above also applies to an LLC partnership or an S Corporation that has more than one owner. 

A company can also have equity partners who invest money into a company and depending on how many shares that they own, will receive a portion of the profit of the company at year end which shows up on their K1 forms which is considered taxable income for the investor (or LLC member). Those same equity partners can also ‘lend’ the company money, and again, the same rules apply. Loans have to have a written agreement with a payback schedule and interest.  By the way, since the interest income is taxable for the recipients and deductible for the company paying the interest, the 1099 that is sent in Jan. of each year would be the 1099 INT form, NOT the 1099 NEC which is designated for subcontractors.

Got all of that?  There'll be a test on this later.  (Just kidding). 

I actually have more situations to talk about on my list, but I think I’ll save those for upcoming episodes.  Tis the season of client stories and (hopefully) interesting situations for you to listen to and plan accordingly moving forward. 

Back to work for me – oh, no ...  it’s Sunday as I write this.  I’m taking the rest of the day off and doing something nice.  Maybe I’ll get a $20 hamburger at a fast-food joint (listen to episode 42)

I digress as usual, but in my younger years, I used to go to one fast food place for the best fries, another fast-food place for the best iced tea, and a third for a great chicken sandwich or fish sandwich.  I’d have the best of all three. I wonder what that fast-food-a-la-carte meal would cost these days. 

But seriously, I hope you are having a great Autumn so far and starting to think about getting your books in order with year-end coming up faster than you think. Be in your ear soon -- 

I’m Paul Rosenblum