Let’s say you put $200,000 of your personal money into your business bank account and record it in your capital account, and you then proceed to start a business. You buy goods and make sales. In the first year, the business makes a NET income of $201,000. Can you simply take your $200,000 back, leaving the business with $1000 of net income to report to uncle Sam? In other words, do you get to say that you only had $1000 of taxable income in the year?
In short, no. The business generated a reportable income of $201,000, which is going to be taxed to the owner (if a sole proprietor), the partners (if a partnership), or directly to the business (if a corporation). If returned from a corporation to shareholders in the form of dividends, it will be taxed again as their personal income. But such questions have nothing to do with Manager as an accounting tool. You need to discuss such things with a qualified accountant. Your tax authority also has publications and online information to learn about such things.
Capital accounts in Manager merely record how much the capital account owners (called members in Manager) currently have invested in the company and, hence, how much the company owes back to the investors.
My apologies if the question seemed ridiculous, but I was trying to understand the basics, so I can set up Manager correctly.
The real life situation is quite different. The business in question (LLC A) borrowed a large sum from a private investor and, basically, lost it all. The owner is determined to pay back what he owes the private investor. So he has decided to start a new business (LLC B) and expects to have high income in the new business.
LLC B is electing S Corp Tax Status. So, basically, LLC A deposited the money it borrowed into its checking account and proceeded to run its business (flipping houses) but basically lost it all, and now has a large loss on the books and no money in the bank. If LLC B has a high net income, how do we record the B income against the losses of A, and avoid taxation?
Let’s say LLC A now owes $1,000,000 (unsecured) to the initial investor. Let’s say LLC B has a net income of $200,000 per year. Both LLCs are single member LLCs owned by the same person. Since LLC B elects the S Corp status, it pays the owner a salary of $40,000 per year. Can the remaining $160,000 in net income that LLC B realizes be transferred to the account of LLC A, so it can continue to pay down its principal debt to the investor, however many years it takes, without the member having to pay tax?
This poor guy made a large loss in his first business, so he should not have to pay tax until he is “back in the positive”. So how do I set up Manager for both LLCs to show what is going on? I have already spoken to two accountants but I am still confused. I am hoping you guys can help me understand the best way to set this up. The losses in LLC A occurred in 2018 so I am trying to enter every transaction into Manager, but am not even sure how to enter HUD1 information, i.e., how to take apart the settlement statements and enter things correctly into Manager.
I already have most of the bank transactions for LLC A entered. The borrowed money is shown entered into a liability account (carried over from 2017 when the loans were taken).
LLC B is a brand new business starting now, and is a retail business so is completely different from LLC A.
My main goal is to try to understand how to record the income from the new business against the losses of the old business.
Or, is this done at the personal level and not directly between the two businesses? But still I somehow have to record everything in Manager.
Please forgive me if this is the wrong place to ask these questions. I have been sitting here for several days trying to learn Manager and how to do the bookkeeping and minimize the tax for this person. I should probably take an accounting class but I do believe I understand the basics. By the way, I absolutely love Manager and the way it is set up! What a beautiful program! Thank you!
This is absolutely the wrong place. Your questions indicate a level of expertise absolutely inconsistent with your stated goal of minimizing tax. Let a CPA handle this. As one example, single-member LLCs and S Corps are two entirely different animals. Their accounting cannot be mixed. The cost of the accountant will be much less than the trouble she keeps you out of.
Well, in the US, an LLC is a disregarded entity for federal tax purposes. They only recognize sole proprietors, partnerships, and corporations. An LLC is strictly a state device.
However, you can “elect” to treat a single-member LLC as an S-Corp for federal tax purposes. No accounting is being mixed here!
As regards to an accountant, of course we have accountants! But they can only work with the material we give them. So it is in our best interest to understand the tax code well, and keep the books correctly and accurately.
Your accountants should be able to explain the tax code and help in formulating your chart of accounts
A in-adapted chart of accounts will be a source of errors and frustration in the futre
You are mistaken, @Learner. You wrote about intermingling transactions and income from two LLCs. But the income of a single-member LLC which has not elected to be treated as an S corporation is reported on Schedule C of the owner’s Form 1040. Income of one which has is reported on Form 1120S. Thus, if you go down the path you have described, you would be mixing accounting.
Any accountant worth using will be able to help you design your accounting system to suit your situation. Then you will be able to give them the information needed to file taxes properly.
Yes, it is. And clearly you still have things to learn about a complex situation. Do yourself a favor and get the advice.
When he mentions LLC - I think these are forms of businesses incorporated in the US
He is not. He said he was from the USA.
As everyone else has said, you have tiger by the tail and need professional advise.
This is not a Manager issue in that you would have the same issue with any accounting package and without experienced professional advice on how to prepare your accounts, you are running a significant financial risk, especially with the moving target of US tax law.
To answer @Learner question:
(not tax advice; just my researched understanding; USA C-corp perspective)
If you net 201K, then that means that you also had revenue that recovered however much of the 200K that was spent on COGS and operating expenses. So, say you spent all 200K on goods/expenses; you then had 401K of revenue; so you had 201K of net earnings.
The IRS would then allow you to take a non-taxable capital distribution of the original 200K that you invested, but only after your took distribution of the net earnings. If you wanted to get your investment 200K out w/o it being a tax event, you would have to first take taxable dividend distribution of 201K, and then take non-taxable distribution of original 200K contribution.