Owners of a C Corporation need to know that taking money out of your business can cost you. Learn about the risks and how to avoid them.
Withdrawal vs. Dividend
An owner or officer who pulls money out of a Corporation can be in trouble if the IRS deems the withdrawal a dividend. A withdrawal deemed to be a dividend is taxable to the owner personally and may not be deductible to the corporation. This can result in extra or unexpected taxes having to be paid. If the distribution is meant to be repayment of a loan or reimbursement for expenses, care must be taken to document the payment properly to avoid such outcomes.
If the payment to the owner is repayment of a loan, make sure a loan agreement or promissory note is executed. The agreement should specify the amount and repayment terms (length of the loan, interest rates, what happens in the case of default, etc.). The agreement should be signed and dated by appropriate parties (board of directors, officers, etc.).
Reimbursement For Expenses
If the repayment is a reimbursement for expenses, make sure the expenses are legitimate and you have backup documentation like receipts that are equivalent to the issued check amount. Without proper documentation, the IRS can deem the payment to be a dividend which will cause unexpected taxes, penalties and interest.
Care should be extended by owners and officers since these are just a couple examples of an area of tax law that can be complicated.
Taking money out of your corporation can cost you if it’s not done properly. Using an accountant with experience in these matters can be worth its weight in gold by helping you stay out of trouble.