The Tax Man Cometh

[bimmer84]

I just finished making an estimated tax payment to the IRS.

I wasn't sure how to categorize the payment. I asked my CPA and his answer was to call it a "distribution". For a newbie to accounting that was pretty cryptic. I looked at my chart of accounts and there isn't a category for setting up a distribution account. I thought it would be an expense category, but if so, maybe it gets pulled into the P/L sheet.

How are you categorizing tax payments?

[qbqcca]

If not all ready in your chart of accounts.

Create a new general ledger account named "Business Taxes" as an "Other Expense"

I hope you miss-understood your CPA because "call it a distribution" is a pretty lame instruction.

[bimmer84]

Originally Posted by qbqcca

If not all ready in your chart of accounts.

Create a new general ledger account named "Business Taxes" as an "Other Expense"

I hope you miss-understood your CPA because "call it a distribution" is a pretty lame instruction.

Thanks much qbqcca! The exact quote is "treat as a distribution". Nothing more was offered. It left me pretty confused. I will follow your advice. Does this mean that it will show in my P/L as an expense?

Another question please. I have been entering my mileage into Quickbooks under the Enter Mileage section in the Company drop down. I am not doing anything else other than enter it there. Shouldn't mileage show up on my P/L report as an expense item?

[Joe Williams]

No, the mileage will not show on the P&L until it is used on a bill or check. It will track the mileage and report it, then you use the total mileage on the Tax form.

[bimmer84]

Originally Posted by Joe Williams

No, the mileage will not show on the P&L until it is used on a bill or check. It will track the mileage and report it, then you use the total mileage on the Tax form.

Thanks Joe! That clears it up for me.

[Deidre56]

Distributions are NOT an expense! This is an equity account. you cannot tax deduct the money you take out of the company.

[bimmer84]

Originally Posted by Deidre56

Distributions are NOT an expense! This is an equity account. you cannot tax deduct the money you take out of the company.

Deidre56,

Thanks Deidre56. So it is not an expense and therefore should not be set up as an "other expense"?

I went back to my CPA for clarification and he said, "It is not a deductible expense so treat it as a draw/dividend/distribution, in other words, as money used by the owner for personal obligations."

I am a bit confused with the different opinions. I am a single member LLC, and this money is withdrawn to pay my quarterly estimated taxes. What I am now hearing is that this cannot be considered a business expense, and therefore is not deductible for the business on the P/L sheet. That makes sense to me, but I am not an accountant.

Am I on the right track now? Thanks everyone.

[Deidre56]

Because you are what is considered a 'pass through' entity, the income and expense from the business flows through to your personal tax return and you pay tax at that level. Each individuals tax bracket can be different so a different person with the same income to report may pay a different amount of tax depending on the level of all sources of income. Keep in mind that your personal deductions then (mortgage int, prop tax on personal residence) are used to reduce the amount of income on your return. Because of this pass through entity status, the amount of tax you pay on your personal return is not deductible by your business. Instead, the monies you withdrawal from the company to use to pay the tax are treated as a distribution. (which is an equity account) As long as you have basis in the company (have not taken out more than your profits), the money you withdrawal and stick in your personal pocket or pay personal expenses, is not taxable.

[bimmer84]

Originally Posted by Deidre56

Because you are what is considered a 'pass through' entity, the income and expense from the business flows through to your personal tax return and you pay tax at that level. Each individuals tax bracket can be different so a different person with the same income to report may pay a different amount of tax depending on the level of all sources of income. Keep in mind that your personal deductions then (mortgage int, prop tax on personal residence) are used to reduce the amount of income on your return. Because of this pass through entity status, the amount of tax you pay on your personal return is not deductible by your business. Instead, the monies you withdrawal from the company to use to pay the tax are treated as a distribution. (which is an equity account) As long as you have basis in the company (have not taken out more than your profits), the money you withdrawal and stick in your personal pocket or pay personal expenses, is not taxable.

Excellent explanation Deidre, thanks.