Can My Company Pay for That? A look at when a company’s earnings belong to the owners.
A question I am often asked when dealing with private companies – especially startups here in New York City – is, “Can my company pay for this?” This question is complex and is based on the facts and circumstance of each item; however, here are some basic guidelines to think about when you run into this issue.
Many owners wish to pay for their taxes, their children’s tuition, car payments, etc. from the company due to the availability of cash. All of these are perfectly fine; however, you may not take them as expenses to the company; they must be taken as distributions.
Depending on the structure of the entity (LLC, S corporation, C corporation, etc.) you may or may not have the ability to take these distributions tax free. This comes back to the question of when is the money the company makes available to the owners.
In the case of an LLC or S corporation, this is dependent on the initial investment of the owners and the cumulative earnings over the life of the business. To the extent the earnings are positive, you may take distributions tax free; however, if this is negative and you take a distribution, you may have to recognize the payment as income. This is a distinction you need to be aware of. Just because the company has money doesn’t mean you are able to use it personally as an owner without tax consequences. In the case of a C corporation, any of these payments would be considered dividends paid to the owners from the corporation and would be taxable as dividend income personally.
This is the concept of “basis.” Money put into the company and earnings provide basis while losses and distributions lower your basis, generally speaking. The short answer to can the company pay for an item is, “Do you have basis?” The long answer consists of a basis calculation and tax analysis.
Before making large payments for personal items from a business, you should always consult your accountant or financial advisor for help in structuring the transactions as advantageously as possible.