No wages or distributions tax question

ChesPest · #1 (**permalink**) 03-07-2009, 10:53 PM

I just started a Pest Control business in April of 2008. I am waiting for a non-compete agreement to end before I do business in a specific area. The business gross income for 2008 was very small because I've been waiting for the non-compete to end <$15,000. My expenses were over $15,000. I didn't pay myself a wage or give myself any distribution because the <$15,000 was going out to build infrastructure. I also used money for the business from my personal credit cards in the form of cash advances then depositing the cash in the business account. I did pull cash out of the business account using an ATM to pay some expenses but I did a very poor job keeping records. My questions are: 1. Is it a rule that I must pay myself a wage? 2. What should I do with the cash withdraws? 3. The cash advanced deposits from my credit card; are they considered income to the business? or can I somehow make them a loan to the business? 4. Do I owe any Taxes to the State/Fed Gov?

I would really appreciate any advice.. thanks.

Dan

TaxGuru · #2 (**permalink**) 03-08-2009, 12:50 PM

With respect to your questions,

1) "is it a rule that I must pay myself a wage?", the answer is no, assuming you had no profits and you are an unincorporated entity.

2) "what should I do with the cash withdraws?", well since you used these to pay for business expenses, you should deduct the cash expenses as business expenses and take a deduction on your schedule C according to the business category it belongs.

3)"the cash advanced deposits from my credit card; are they considered income to the business?", no they are not, and as such if you deposit these into your business account, they are really considered as either additional paid in capital or a loan from the owner and not considered as income on the tax return.

4) "do I owe any Taxes to the State/Fed Gov?", it all depends according to whether or not you are a corporation or not, if you are a corporation, you would be liable for the minimum franchise tax applicable to that state which you are operating. For example, if you were a New Jersey Corporation, irrespective of whether or not you have made a profit or not, you would be liable for the minimum NJ Franchise Taxes of $520.

On the other hand, if you are a sole proprietership you would not generally be responsible for any Federal or State business taxes as such!

ChesPest · #3 (**permalink**) 03-09-2009, 10:35 AM

I am an S-Corp in Maryland. How does that effect me?

Thanks again
Ken

TaxGuru · #4 (**permalink**) 03-09-2009, 10:46 AM

As an S Corporation based in Maryland, if you have no profits, there is no need to take a salary as your business did not have the cash flow to sustain any Wages or Salary to its principal officers or shareholders, which is you!

Also, any additional investments that you have provided to the Corporations are not considered income to your S Corporations, rather they are considered as loans from the shareholders. But, you still will have to file both a Federal 1120 S corporation tax return along with the Maryland S corporation tax return.