Frequently Asked Questions – December

In our second installment of frequently asked questions, we bring to light some answers that will likely be helpful for any business owner. If you have a question you would like addressed, please feel free to send it to us.

If you are the owner, how do you pay yourself through the company? —Adrienne Hirschauer
Like most questions, the answer is “it depends.” A self-employed individual operating out of a single member LLC doesn’t need to “pay” himself anything, all profit is taxed as income regardless if it is taken out of the company or left in the operating account.

A business owner with partners has a couple options: distribution or salary. Consider the case of two owners; one invested the funds and the other had the idea and runs the day to day operations. Typically, an owner/operator receives a salary since they are doing the work and that is their full-time job. Assuming the investor partner is not active, he or she might only receive profit distributions. When profits are distributed, these typically go pro-rata to each partner unless something in the operating agreement specifies to the contrary. However, due to the ways partnerships are taxed, there is no requirement that any partner receive a salary; income tax is paid on each partner’s distributive share of income regardless of the actual cash received by that partner.

An owner of a S-Corp actually MUST take what the IRS defines as “reasonable compensation”. Meaning, a business owner paying a subordinate MORE than they make probably isn’t reasonable. There are some guidelines here but as long as the owner(s) compensation is reasonable, any excess profits can be taken as distribution, subject to certain limits of course. Also, the owner could receive other benefits such as personal use of a company card or benefits available to all other employees.

When is the best time to buy equipment in my business? —Jeff Heybruck
We get this question quite often from clients who are usually motivated by a few factors: very attractive financing (usually around 2% or below), good deals (lightly used, trade-in, or year-end closeout) and a desire to maximize deductions to minimize taxable income (Section 179, etc). Our first piece advice is to put the tax benefit motivator at the bottom of the list. Too often we see clients make a business decision based on the tax result only. Tax deductions should be factor in spending money but not the reason to spend money.

Instead of focusing on the tax benefit, Lucrum encourages clients to focus on the business need. Specifically, when does the business need the asset? If a truck is broken in the shop with a blown motor, the need is probably quite urgent. But if a client is going into a slow period and has been occasionally renting a skid steer to handle excess demand, it probably makes sense to defer that purchase to a time when business demand starts to pick back up. Assuming winter is a slow period, that deferment saves the client 4-5 months of payments and carry costs on an asset that may be sitting in the yard most of the time.

Assuming the timing is right from a business standpoint, then we can analyze the tax benefit to ensure the business can maximize deductions. Similarly, we also would compare price and financing to the timing of the purchase since neither of those factors are good reasons to invest in new equipment if the business need is not justified.

What is the correct and easiest way prorate my employee’s salary down to an hourly rate? —Stephanie Carlson
You first begin by taking your employee’s salary amount and dividing it by 2080 hours, which is the number of hours that the typical 40 hr/wk employee works with no overtime. To prorate, take that hourly amount and multiply it by the number of hours the employee worked. Example: $40,000.00 salary / 2080 = $19.23. If the employee worked 10 days in the pay period (80 hours), that would be $1538.40 gross pay to the employee for the period.

Is it possible to create a template for chart of accounts to make it easier to set up a QuickBooks files for our investment companies and a different one for the development company and then another for an operating storage business? —Debbi Silva
Yes, a full set of chart of accounts can be set up in Excel, adapted as needs change, and imported into a new QB file. Thus it is possible to have several charts of accounts set up for various types of businesses making it easy to open a new QB file and set it up within minutes.