Convention QA: Recouping Equity

Video Transcript:

Desiree at Pic Town Artworks and my questions is we’re new and we’re still self-funding so when do that, how do we report that money that we put into the business from our own funds.

Thanks for your question, Desiree. This is a very common area where there is a lot of confusion, so let’s see if we can square it away. First off, putting money into the business as you’re growing is called an equity contribution. That equity contribution is not a tax effect, so you putting money into the business doesn’t cause you any more taxes, nor does it avoid any taxes when you take the money back out when you’re profitable and have the cashflow to do that, that is again, an equity transaction. So the equity may be removed from the business without any tax consequence. Now you do have to watch if you have loans on your business. You can’t take out more than you’ve put in personally. You can’t take out the proceeds of a loan and not have a tax consequence. But taking the equity back out as soon as you have that cashflow is absolutely fine. It depends on your tax structure as to how it’s reported and what terminology is used, but in most cases, that is not going to have any tax consequence. So feel free to write yourself a check or transfer those funds right back to your personal account without consequence.

Donna Bordeaux, CPA with PYOPAccounting.com.

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