As we endure a seemingly endless 2020, many self-employed business owners are watching their personal financial resources wither away or are already fully exhausted. Government stimulus payments and disaster loan programs were fantastic while they lasted, but now they may be gone. What if there were ways to access funds within your company that did not involve embezzlement, fraud or the creation of a giant tax liability?
Business owners have access to not only their personal financial resources, but also those of their company’s that they control. If structured correctly, business owners may have an additional lifeline for cash that bona fide W2 employees do not. Here are three ideas to keep in mind the next time you are looking for some additional funding for your personal use.
- Host your company meetings at your primary residence. Section 280A(g) of the Internal Revenue Code allows you to rent out your primary residence for up to 14 days per year without having to claim the income. Make sure you appropriately document the applicable market rent amount, purpose of the meetings (other than entertainment) and attendance. The lavish travel of corporate board retreats may have been a thing in the late 90s and early 2000s, but the tax benefit for your personal well being will be better off if you hold the meetings at your home, this year.
- Return excess capital to shareholder employees, partners or members. If your business does not need to carry a significant cash reserve for expansion or other working capital requirements, you may want to consider making a distribution to the owners. To the extent you have basis, the distribution will remain tax free. Okay, I needed to write one line of jargon to keep some credibility with my professional peers. As a quick refresher, basis can be considered your remaining skin in the game and cushion available to absorb future losses. If you distribute more than your remaining basis, then you may trigger a capital gain transaction. Basis in pass-through entities like S Corporations, LLCs and Partnerships changes with each transaction of the business activity, so you will want to calculate your basis annually or more frequent when considering a significant change in capital. Also, if your business has an outstanding loan through the Economic Injury Disaster Loan program from the SBA, then there are restrictions regarding capital distributions while the loan remains unpaid.
- Make the most of your expense reimbursements. Maintaining an accountable expense reimbursement plan can allow your company to provide you with cash reimbursements for the business use of your personal assets. To audit proof your records, you will want to appropriately document the business use percentage, amount, purpose description, dates and other relevant information pertaining to the reimbursement.
My prior experience as an auditor within the gaming industry and as the Chief Financial Officer of a community bank, I have seen my share of schemes, frauds and ill-conceived methods for gaining access to cash. By using the three methods I listed above, I hope you won’t need to resort to slipping an extra black chip under your tie clip while dealing at the blackjack table or committing a federal felony on a loan application.
To learn more legal, tax-saving strategies for business owners, or get help with an IRS tax problem, contact me at (360) 474-5892 or e-mail me at tate@ensigncpa.com.
Tate Ensign, CPA
T.S. Ensign, CPA & Company, Inc.
P.O. Box 956
Ravensdale, WA 98038
(360) 474-5892
Fax (360) 474-5825
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