Income & Expenses for a Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one person. The business is not a separate business entity. All the business income and expenses are considered to be your income and your expenses. You can freely move into or move out from your business without any tax consequences. However, it always recommends that the business books be kept separate from one’s personal financial records.

Put Money into your business

You need to set up an “owner’s contribution” account using equity account.  When you write a check from your personal funds and deposit into your business bank account, your funds in are not income, just increase in Equity.

If you use your business dollar for business-related items,keep receipts!You’ll need them to support your deductions and to record the amount of the expenses in your books. If you pay some of your business expenses with a business credit card, itemize the expenses you are paying when you write the check to pay the credit-card bill. For example, if you are paying a $100 business credit-card statement, $70 may be payment for advertising and $30 may be for a meal with a business client. Each of these expenses must be separately and accurately recorded in your business book. The entries include date, where and business purpose for good tax report when you file your tax return. For example, business meals and entertainment are only deductible at 50 percent.

Sometime you pay some of your business expenses with your personal fund whether it is cash, check or credit card does not matter. For example, let’s say you spent $50 on office supplies. The expense is deductible for tax purpose and this increases your equity. There is no reimbursement issue for a sole proprietor. You can deduct all business expenses from taxable business income.

Take Money Out of Your Business:

Withdrawals of cash or property out of your sole proprietorship for your own personal use are called draws. A draw represents a reduction of business capital; it is not a deductible business expense.

You can take money from your business any time you like. You have the option to elect the dollar amount and frequency of “Draw” payments from the business to you.  You can elect to take draw payments periodically throughout the tax year, take them on a purely “as needed” basis, take one draw payment on the last day of the tax year, or any combination of draw checks you desire.  You simply write a check out of the business checking account, made payable to yourself, and either deposit it into your personal bank account, or cash it at the bank.

As a sole proprietor, you can take money out of the company for any thing. You can pay for private expenses like your utility bill from your business account. You can buy a new television for your home. As long as the money is in you business bank account, it is yours to withdraw. Every time you take money out it’s an owner’s draw. You must record that as Drawings in your accounts.

As the owner of a sole proprietorship you’re not considered an employee of your own business. This means you don’t pay yourself salary or have taxes withheld from your withdraw or issue W-2 Form to yourself.

If you have employees, it’s important to separate the payroll checks you write from any draws you take to pay yourself from the business. Payments to employees are deductible expenses, but checks you pay yourself in a Schedule C business are not.

Taxation on sole proprietors

Sole proprietors are taxed on all profits in the year for income and self employment tax purposes, whether the owner takes the money out of the business or not. The bottom line of Schedule “C” shows the profit of your business for the entire tax year.  This total net profit figure will flow through to your personal income tax return (Form 1040) and become taxable income to you personally. You are personally liable for income tax due on your business’ net profit – whether or not you choose to actually take the dollars out of the business. So the writing of a “draw” check to yourself does not in any way change the total amount of business profit that is shown on your Personal Income Tax Return, Form 1040.

Report Business Income and Expenses on Schedule C

Schedule C is used to report business income and expenses by a taxpayer who is engaged in a trade or business during the tax year. In order for an activity of a taxpayer to constitute the carrying on by the taxpayer of a trade or business within the meaning of section 162(a), the taxpayer’s primary
purpose for carrying on the activity must be for income or profit. Moreover, the taxpayer must be involved in the activity with continuity and regularity. A sporadic activity will not qualify as carrying on a trade or business for purposes of section 162(a). In addition, the trade or business requirement of section 162(a) is not met until the trade or business has begun to function as a going concern and the activities for which it was organized are performed. If you have two or more separate business activities, you must report business income and expenses on different Schedule Cs for each activity.

Some businesses are actually hobbies where there is no real intention of ever making a profit. Businesses deemed to be hobbies have special rules that limit the expense deductions to the income and require the deductions to be taken as an itemized deduction on Schedule A instead of Schedule C.

One last factor to keep in mind is that the tax law provides for separate treatment of different business entities (sole proprietorship, LLC, partnership, “S” corporation and “C” corporation). A partner cannot deduct expenses on his or her own schedule C if they were incurred on the partnership’s behalf, because it is not “necessary” that a partner pay for them with his own funds. The trade or business of a corporation engaged by the taxpayer is distinguished from the trade or business of the taxpayer himself. All the expenses incurred by (or for the benefit of) the corporation must be deducted on the corporation return because they are not related to the taxpayer’s trade or business in contrast to the trade or business of the taxpayer’s corporation.

One exception for this is a single-member LLC if not elected to be treated as a corporation. The LLC is treated as “disregarded entity”, and the LLC’s activities should be reflected on its owner’s federal tax return. An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.

4 Comments

  1. Excellent post. I was checking constantly this blog and I’m inspired! Very helpful info particularly the remaining section 🙂 I care for such info a lot. I used to be looking for this certain information for a long time. Thank you and best of luck.

  2. I found your blog website on google and check several of your early posts. Continue to keep up the really very good operate. I just extra up your RSS feed to my MSN News Reader. Looking for forward to reading much more from you later on!?

  3. Pingback: Fake Oakleys Sunglasses

  4. Pingback: maillot de foot

Comments are closed.