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> . If you try to maintain a $20k balance for a year, for example, you’ll discover that this balance counts against your deductions for that tax year (effective

> . If you try to maintain a $20k balance for a year, for example, you’ll discover that this balance counts against your deductions for that tax year (effectively a negative $20k deduction). Or at least that’s my understanding so far. You don’t get taxed on having a balance; you do get taxed on the income that generated it. (Or am I missing something crazy?)

sillysaurusx 5y ago
My notes so far: https://shawwn.notion.site/Business-Taxes-e9f602855f524618b0a82733ccea9f91 https://shawwn.notion.site/Business-Taxes-e9f602855f524618b0... In one of these links, I am quite certain I saw words to the effect of "if you maintain a balance in the business, then the following tax year, it will count as a negative deduction for the shareholders (i.e. you), because the business type is a pass-through entity, and pass-through entities are expected to pass all of their income through to the shareholders." The fact is, I don't know whether it was an LLC or a sole proprietorship, and I'm now second guessing what I thought I knew. Because yes, it does sound pretty ridiculous that an LLC needs to maintain a $0 balance or else it will penalize the owners of said LLC. That doesn't sound right. And yet, words to that effect were located in one of these links. (Hunting for it now.) EDIT: Welp. Can't find it anywhere. At least I admitted from the outset that "ask your accountant, do not trust me" is reasonable advice for anyone thinking of taking business advice from random HN comments. I'll downshift to "I don't know whether it's a bad thing to maintain a long term balance in an LLC, but I'll be finding out the answer before the end of this tax year." If there's no disadvantage to keeping a balance in an LLC, then I revert to "Just form an LLC for yourself; it costs $50 to do so. And you can keep as much money in it as you want, as long as you don't mind paying income tax simply for transferring money into your LLC." It's possible I was thinking of a negative tax basis for an S corporation, if the S corporation has a long term account balance. But a tax basis is certainly not the same thing as a tax deduction, so I throw my hands up in the air and say "I'll be using a portion of my consulting income to clarify these questions with both an accountant and a lawyer; all advice should be considered suspect."
- LiNeXT 5y ago
  > Because yes, it does sound pretty ridiculous that an LLC needs to maintain a $0 balance or else it will penalize the owners of said LLC. That doesn't sound right. It's definitely not correct at all. Neither is issuing phantom invoices to yourself to put money into the account. A bank account is just a vehicle to store business cash, it really has nothing directly to do with the way you should be maintaining your LLC's books. You should be recording things like that as "capital contributions" which increase your "capital account." Similarly, profits and losses should be booked to your capital account. I would strongly recommend doing some reading on capital account bookkeeping.
  - sillysaurusx 5y ago
    Excellent -- thank you very much for the corrections. I was wondering precisely that, when I was initially funding my Mercury account. I may have given the wrong impression, but to be clear I certainly wasn't recommending using Mercury as your tax accounting software! I was saying that as long as income flows into your LLC's bank account, and out into your personal account, and that you never use your business account for personal expenses, then you have nothing to worry about. I really appreciate the reference on capital accounts; not knowing how to classify inbound transfers from my personal account was bothering me. That still raises the question of whether there is a tax, and how much the tax is. Are you saying there's no income tax when you transfer your personal funds into an LLC, since capital contributions aren't income? After pausing and searching for the answer to my own question, https://howtostartanllc.com/form-an-llc/contributions-and-distributions-the-basics-of-llc-ownership https://howtostartanllc.com/form-an-llc/contributions-and-di... -- the answer is probably "no, not even slightly" and also "this is suddenly quite complicated." https://www.legalzoom.com/articles/how-to-add-capital-contributions-to-an-llc https://www.legalzoom.com/articles/how-to-add-capital-contri... seems slightly less complicated: > If you plan to contribute property, you will need to obtain a market valuation to determine the value of the property you are contributing to the LLC. Capital contributions in the form of property may also attract a number of potential tax consequences, so it's generally a good idea to consult with a tax advisor beforehand. > You also can make a capital contribution in the form of services. As with property, you will need to obtain a market value for the value of your services. There also are tax consequences, as you will have to treat this value as if it were actual income you earned for your services, meaning you will have to pay personal income taxes on the value of these services. Because of this, services are not as popular a form of capital contribution. So, yes, you can "invoice for services rendered" (aka services capital contribution, apparently) but it'll be taxed as income. Therefore, you want to contribute property, and the tax consequences are left as an exercise to the reader. Looks like I'll be completing that exercise, but perhaps not at 2:30am. Cheers for the tips. EDIT: Two more useful resources: - https://www.law.cornell.edu/wex/contribution https://www.law.cornell.edu/wex/contribution > The capital contribution increases the owner or partner's equity interest in the entity. Capital contributions are not considered business income unless given in the form of a loan. - https://ttlc.intuit.com/community/business-taxes/discussion/how-do-i-enter-capital-i-contributed-to-an-llc-partnership-on-my-personal-tax/00/495385 https://ttlc.intuit.com/community/business-taxes/discussion/... > For a Single Member LLC (that has not made an election to be taxed as a corporation), the IRS does not recognize the LLC exists (for most purposes). Therefore, you and the LLC are the same. Therefore, there really isn't such thing a Capital Contribution for tax purposes. Apparently "It's complicated(TM)" is still the final answer, because single member LLCs can't have Capital Contributions. Hmm. One reason I post openly about this sort of thing is precisely because people like yourself come out and correct my misunderstandings. So again, thank you! This is certainly a reminder that I have lots more reading to do.

sillysaurusx 5y ago

My notes so far: https://shawwn.notion.site/Business-Taxes-e9f602855f524618b0a82733ccea9f91 https://shawwn.notion.site/Business-Taxes-e9f602855f524618b0... In one of these links, I am quite certain I saw words to the effect of "if you maintain a balance in the business, then the following tax year, it will count as a negative deduction for the shareholders (i.e. you), because the business type is a pass-through entity, and pass-through entities are expected to pass all of their income through to the shareholders." The fact is, I don't know whether it was an LLC or a sole proprietorship, and I'm now second guessing what I thought I knew. Because yes, it does sound pretty ridiculous that an LLC needs to maintain a $0 balance or else it will penalize the owners of said LLC. That doesn't sound right. And yet, words to that effect were located in one of these links. (Hunting for it now.) EDIT: Welp. Can't find it anywhere. At least I admitted from the outset that "ask your accountant, do not trust me" is reasonable advice for anyone thinking of taking business advice from random HN comments. I'll downshift to "I don't know whether it's a bad thing to maintain a long term balance in an LLC, but I'll be finding out the answer before the end of this tax year." If there's no disadvantage to keeping a balance in an LLC, then I revert to "Just form an LLC for yourself; it costs $50 to do so. And you can keep as much money in it as you want, as long as you don't mind paying income tax simply for transferring money into your LLC." It's possible I was thinking of a negative tax basis for an S corporation, if the S corporation has a long term account balance. But a tax basis is certainly not the same thing as a tax deduction, so I throw my hands up in the air and say "I'll be using a portion of my consulting income to clarify these questions with both an accountant and a lawyer; all advice should be considered suspect."

LiNeXT 5y ago
> Because yes, it does sound pretty ridiculous that an LLC needs to maintain a $0 balance or else it will penalize the owners of said LLC. That doesn't sound right. It's definitely not correct at all. Neither is issuing phantom invoices to yourself to put money into the account. A bank account is just a vehicle to store business cash, it really has nothing directly to do with the way you should be maintaining your LLC's books. You should be recording things like that as "capital contributions" which increase your "capital account." Similarly, profits and losses should be booked to your capital account. I would strongly recommend doing some reading on capital account bookkeeping.
- sillysaurusx 5y ago
  Excellent -- thank you very much for the corrections. I was wondering precisely that, when I was initially funding my Mercury account. I may have given the wrong impression, but to be clear I certainly wasn't recommending using Mercury as your tax accounting software! I was saying that as long as income flows into your LLC's bank account, and out into your personal account, and that you never use your business account for personal expenses, then you have nothing to worry about. I really appreciate the reference on capital accounts; not knowing how to classify inbound transfers from my personal account was bothering me. That still raises the question of whether there is a tax, and how much the tax is. Are you saying there's no income tax when you transfer your personal funds into an LLC, since capital contributions aren't income? After pausing and searching for the answer to my own question, https://howtostartanllc.com/form-an-llc/contributions-and-distributions-the-basics-of-llc-ownership https://howtostartanllc.com/form-an-llc/contributions-and-di... -- the answer is probably "no, not even slightly" and also "this is suddenly quite complicated." https://www.legalzoom.com/articles/how-to-add-capital-contributions-to-an-llc https://www.legalzoom.com/articles/how-to-add-capital-contri... seems slightly less complicated: > If you plan to contribute property, you will need to obtain a market valuation to determine the value of the property you are contributing to the LLC. Capital contributions in the form of property may also attract a number of potential tax consequences, so it's generally a good idea to consult with a tax advisor beforehand. > You also can make a capital contribution in the form of services. As with property, you will need to obtain a market value for the value of your services. There also are tax consequences, as you will have to treat this value as if it were actual income you earned for your services, meaning you will have to pay personal income taxes on the value of these services. Because of this, services are not as popular a form of capital contribution. So, yes, you can "invoice for services rendered" (aka services capital contribution, apparently) but it'll be taxed as income. Therefore, you want to contribute property, and the tax consequences are left as an exercise to the reader. Looks like I'll be completing that exercise, but perhaps not at 2:30am. Cheers for the tips. EDIT: Two more useful resources: - https://www.law.cornell.edu/wex/contribution https://www.law.cornell.edu/wex/contribution > The capital contribution increases the owner or partner's equity interest in the entity. Capital contributions are not considered business income unless given in the form of a loan. - https://ttlc.intuit.com/community/business-taxes/discussion/how-do-i-enter-capital-i-contributed-to-an-llc-partnership-on-my-personal-tax/00/495385 https://ttlc.intuit.com/community/business-taxes/discussion/... > For a Single Member LLC (that has not made an election to be taxed as a corporation), the IRS does not recognize the LLC exists (for most purposes). Therefore, you and the LLC are the same. Therefore, there really isn't such thing a Capital Contribution for tax purposes. Apparently "It's complicated(TM)" is still the final answer, because single member LLCs can't have Capital Contributions. Hmm. One reason I post openly about this sort of thing is precisely because people like yourself come out and correct my misunderstandings. So again, thank you! This is certainly a reminder that I have lots more reading to do.