In the start up phase of my business, prior to any income earned by the LLC (or S Corp) how is money I'm living on from my savings viewed?
Is it an investment in my LLC?
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Listen to the audio
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In this audio snippet, you'll hear about:
- A lot of people make unfounded assumptions in this area.
- Basic living expenses are not deductible
- If something is a business expense, then the business should pay for it
- Business could reimburse you, but then it gets complicated
- If you lay out money on behalf of your entity, then the entity should reimburse you. There should be a paper trail to prove it.
Audio Transcript
Travis:
Here's a specific question that I got
several times. But I'm going to say it in the exact words of one of the
people that sent it to me. It says, "In the start–up phase of my
business, prior to any income earned by the LLC or S–Corp, how is money
I'm living on from my savings dued? Is it in investment in my LLC?"
Yosef:
That's a great question. You know, I'm glad that somebody actually
asked you that question. A lot of people don't ask that question, they
make certain assumptions that are totally unfounded.
Travis:
Great.
Yosef:
But the fact that you're being asked that question illustrates the
importance of the question, but also illustrates the fact that most
people don't think about these things, and they really should. Basic
living expenses are never deductible. Not only are they not deductible
when you work for somebody else, but even when you work for yourself.
Travis:
OK.
Yosef:
Those basic living expenses aren't... If they would be deductible to
you, they would be deductible to everyone. And if they were deductible
to everyone, then our tax rates would just go higher.
Travis:
Right. [laughs] There would be no other choice.
Yosef:
Right. Now, I think the point that he's trying to make is that he's
trying to discuss a sacrifice that he has to undergo, while trying to
start a full entrepreneur business. And unfortunately, I believe that
when some one's in business for themselves, if you want to be in
business for yourself, you need to put in $2.00 of work for every $1.00
that you make.
And
that being said, that extra dollar that you have to put in beyond what
a typical employee has to put in order to make a dollar, is
unfortunately not something that's going to give you any tax benefit.
Travis:
OK.
Yosef:
It's just not the way it works.
Travis:
Right. The work you put in now is going to come back to you in money later on if you're doing it right.
Yosef:
That's right. It will come back to you as royalties, as additional
profits. Now that being said, there are certain expenses that you will
have, that will be business related, that may also have some personal
benefit, that will still be deductible. For example, the use of your
vehicle, the use of your cell phone. The business use of your home may
or may not be deductible.
Travis:
So money that is deductible, do you transfer that from your personal
accounts into your corporate accounts as an initial start–up investment
in the company?
Yosef:
OK. Here's the way that I would recommend my clients to handle those type of expenses.
Travis:
OK.
Yosef:
If something is a business expense, then the business should pay for it.
Travis:
Makes sense.
Yosef:
It's not something you would personally pay for, and then expect the
business to reimburse you. The business could reimburse you, but then
it gets complicated.
Travis:
All right.
Yosef:
I've actually had this discussion with a supervisor at the IRS, exactly
what their expectations would be from a taxpayer who did that. It
wasn't clear to me whether they had a consistent position on the
subject, just based on speaking to her. I'm sure there are some
regulations somewhere that discuss this in greater detail.
But
frequently if you lay out money on behalf of your entity, the entity
should reimburse you. You should submit copies of your expenses to the
entity, and there should be a paper trail substantiating what's going
on. But there has to be some activity that shows that those expenses
were reimbursed to you, in some fashion or another.
Travis:
OK. So really either way it could work. There's a better way to do it,
depending on somebody's particular situation, but either way you can
pay for it with your personal funds or you can transfer it into the
corporation so that the corporation can pay it?
Yosef:
We'll take a step back, and let me tell you what I recommend to all my clients.
Travis:
OK.
Yosef:
Starting with whether it's an LLC or it's a corporation, I would open a banking account and get a credit card account.
Travis:
All right.
Yosef:
Credit card accounts you may not be able to secure against the
corporation's credit, maybe, I guess what you'd call a personal credit
card account.
Travis:
Mm–hmm.
Yosef:
But use that credit card specifically only for business use.
Travis:
OK.
Yosef:
Remember, large banks will give you a business credit card. Basically
you would charge up credit card expenses on that credit card, and then
you pay that bill directly out of the business account. This way is a
very clear and clean bifurcation between your personal and business
expenses.
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