# Paying yourself back tax free for equipment purchased before you started your busines



## Spencer (Jul 6, 2005)

Just curious if anyone could shed some light on this topic.

The goal is to get as much profit out of the business checking account and into the personal account with as little tax as possible.

Someone mentioned in another thread that you could pay yourself back for equipment purchased prior to starting your business formerly and I was wondering if anyone has done this or could shed some light on the tax advantages?


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## GovtContractor (Dec 4, 2014)

You'll want to double check this with your CPA. 

If the business pays out any funds to another person or entity, with the exception of a corp. to corp. transaction, the business is required to issue a 1099. You'll then have to report the income on your personal taxes. 

The equipment will have to be purchased at fair market value and in certain states, their could be sales tax or use tax obligations. 

What is the structure of your business entity?


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## kiteman (Apr 18, 2012)

Not tool related, but look at setting up a flex plan for medical expenses. That all comes out tax-free.


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## Jaws (Dec 20, 2010)

kiteman said:


> Not tool related, but look at setting up a flex plan for medical expenses. That all comes out tax-free.


The dude who is doing my daughters college fund and my "retirement " told me to do that. I told him id do some for the wife and kid but i rarely go to the doctor. Right after that i tore some scar tissue and my wife reminded me i almost cut my thumb off two year ago......

So the Flex thing looks smart :laughing:


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## Warren (Feb 19, 2005)

This transaction would have needed to occur last year to be valid for 2014. I would imagine that it could not exceed fair market value, and may require a 1099 as posted earlier. Welcome to the world of business. Nice to make a profit, but those taxes, especially SS can really add up. 

Make sure you max out any retirement accounts also. You can contribute to an existing plan in 2015 and have it count towards 2014.


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## Spencer (Jul 6, 2005)

Warren said:


> This transaction would have needed to occur last year to be valid for 2014. I would imagine that it could not exceed fair market value, and may require a 1099 as posted earlier. Welcome to the world of business. Nice to make a profit, but those taxes, especially SS can really add up.
> 
> Make sure you max out any retirement accounts also. You can contribute to an existing plan in 2015 and have it count towards 2014.


Thanks

Last year was a killer. The only thing that saved me is that I spent an obscene amount on tools and equipment.

I am in a much better position this year now that I have my LLC setup. I took a very low salary this past year so I was able to pretty much cut that in half for salary and then take the other half in distributions. 

I am also paying myself rent for use of our garage as a shop. Its about 1500 sq ft worth of space so I can pay myself a pretty good portion and have it not be subject to FICA. So between that and distributions I'm covered pretty well to get profit out without being subject to FICA but was wondering if the whole tool loan repayment would be exempt from income tax as well.


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## kiteman (Apr 18, 2012)

If you wrote off the tools as an expense before you started the llc, then you have to pay tax on the recapture. Same as if you depreciate a vehicle, then sell it. You owe tax on the residual sales amount. 

Be careful on those distributions. Your salary needs to appear to be a "reasonable" amount.


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## hdavis (Feb 14, 2012)

You can transfer them in at depreciated value or lease them. Leasing has the flexibility of being able to have two payments show up in one year, and no payments show up in another, and the lease costs can vary. Insurance can be more complicated, but doesn't have to be.

Before you do that, you need to find your compelling business reason for leasing from yourself. I say that because it is now written into the tax code that if the IRS decides you did something to pay less taxes, it's disallowable. You have to have a compelling business reason.

If you're operating under an LLC to decrease your personal liability, leasing your equipment to the LLC decreases it's assets that are at risk. If for some reason the LLC gets nuked, you still have your equipment, so you can still work.


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## Jaws (Dec 20, 2010)

I wish id been smart enough business wise to of thought of this the year after we started. Probably could of been repaid the seed money and tools & trailers.


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## kiteman (Apr 18, 2012)

Jaws said:


> I wish id been smart enough business wise to of thought of this the year after we started. Probably could of been repaid the seed money and tools & trailers.



Seems to me that could still be calculated as equity. If you're an s corp you could take it as a tax-free distribution. Doesn't really matter when.


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## Spencer (Jul 6, 2005)

kiteman said:


> If you wrote off the tools as an expense before you started the llc, then you have to pay tax on the recapture. Same as if you depreciate a vehicle, then sell it. You owe tax on the residual sales amount.
> 
> Be careful on those distributions. Your salary needs to appear to be a "reasonable" amount.


I don't think it will work for me because I did already write them off from years past. 

Oh well, it was an idea worth exploring.


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## Jaws (Dec 20, 2010)

kiteman said:


> Seems to me that could still be calculated as equity. If you're an s corp you could take it as a tax-free distribution. Doesn't really matter when.


Good point. Ill bring it to the CPAs attention. Thanks. Our tax bill will be significant but not too bad, we added on to the shop again and bought some equipment. 

I wish there was a way to add to reserve accounts tax free.


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## Spencer (Jul 6, 2005)

kiteman said:


> If you wrote off the tools as an expense before you started the llc, then you have to pay tax on the recapture. Same as if you depreciate a vehicle, then sell it. You owe tax on the residual sales amount.
> 
> Be careful on those distributions. Your salary needs to appear to be a "reasonable" amount.


My CPA made it sound like since I paid myself a small salary for the last year I had a very valid argument with the IRS for what what I am paying myself now being that it is slightly less than what I have lived off of in the past.

I was surprised that he acted like your salary plus distributions was what the IRS would look at to see if it is "reasonable" vs just your salary alone. I know it also has to line up with average wages for the particular job.

Taking this step alone is going to save me $3000 on every $20,000 in distribution income. I don't understand why so many people don't take full advantage of these tax loop holes.


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## kiteman (Apr 18, 2012)

Maybe we just don't want to talk about them on a public forum...........


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## Jaws (Dec 20, 2010)

Spencer said:


> My CPA made it sound like since I paid myself a small salary for the last year I had a very valid argument with the IRS for what what I am paying myself now being that it is slightly less than what I have lived off of in the past.
> 
> I was surprised that he acted like your salary plus distributions was what the IRS would look at to see if it is "reasonable" vs just your salary alone. I know it also has to line up with average wages for the particular job.
> 
> Taking this step alone is going to save me $3000 on every $20,000 in distribution income. I don't understand why so many people don't take full advantage of these tax loop holes.


Im an S corp. My CPA tried to get us to raise our salary again. We have 3 times. No more. 

Whatever is salary under 120k is like 15%. When i take a distribution its like 30% whether my salary is 50k or 119k from my understanding.


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## hdavis (Feb 14, 2012)

Guys, these aren't loopholes. The tax code is written to encourage certain activities and ways of doing business and discourage other activities and ways of doing business. You're just bringing your business in line with the IRS' incentives / disincentives.


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## Spencer (Jul 6, 2005)

hdavis said:


> Guys, these aren't loopholes. The tax code is written to encourage certain activities and ways of doing business and discourage other activities and ways of doing business. You're just bringing your business in line with the IRS' incentives / disincentives.


Thats what I meant. I struggled with what word to use in my previous post. Advantages is a better word than loopholes.


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## Spencer (Jul 6, 2005)

kiteman said:


> Maybe we just don't want to talk about them on a public forum...........


I got nothin to hide. Thats the whole point of the conversation. If I didn't want to follow the rules I would just get paid in cash and not waste my time with conversations like this.


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## Spencer (Jul 6, 2005)

Jaws said:


> Im an S corp. My CPA tried to get us to raise our salary again. We have 3 times. No more.
> 
> Whatever is salary under 120k is like 15%. When i take a distribution its like 30% whether my salary is 50k or 119k from my understanding.


That is weird. What you described is the exact opposite of how it is for me. When I take a distribution I save the 15% that normally goes for FICA. When I take a salary it get taxed at the income tax rate plus FICA and local stuff which comes out to around 35%. Its a big tax advantage to take distributions for me. For me raising my salary would defeat the whole purpose of having the tax advantages of an S-Corp.

It might be because you have politicians that make sense in Texas.


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## overanalyze (Dec 28, 2010)

Spencer said:


> That is weird. What you described is the exact opposite of how it is for me. When I take a distribution I save the 15% that normally goes for FICA. When I take a salary it get taxed at the income tax rate plus FICA and local stuff which comes out to around 35%. Its a big tax advantage to take distributions for me. For me raising my salary would defeat the whole purpose of having the tax advantages of an S-Corp.
> 
> It might be because you have politicians that make sense in Texas.


Yeah same here Spencer. We don't pay payroll taxes on the distribution, just the income tax. 

You just can't have more distributions than salary dollars. They say you should be getting a salary comparable to someone in your area performing similar tasks.


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## Spencer (Jul 6, 2005)

kiteman said:


> He should clarify that's TAXABLE income, so subtract $20,300 from gross income for a couple, no kids and the standard deduction.



Yeah. I'm about as qualified to talk about this stuff as a snowman.


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## TNTRenovate (Aug 19, 2010)

Warren said:


> Any discrepancy can be remedied by filing a new W4 with your employer. Ideally, you would want your tax refund to be zero.


I don't follow. If I pay too much how would a new W4 remedy it? I could have a bad fourth quarter and that would change my rate. A new W4 would allow me to change my exemptions, but I don't see how it would help otherwise.


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## TNTRenovate (Aug 19, 2010)

Spencer said:


> This is new territory for me. I was under the impression that you always pay the exact 15% tax rate if you are in that bracket. So if my gross weekly check is $1000 I'm paying $150 for federal income tax. I didn't realize your hourly rate made a lick of difference...???


If your gross was $1000 a week your bracket would be the 25% bracket.

If you are hourly your hours could fluctuate thus changing the total on your check. So I could work 15 hours one week and be in a different bracket than if I work 60 hours a week. The 60 hour a week check would be taxed at a higher rate.


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## pcplumber (Oct 12, 2008)

TNTSERVICES said:


> But you are adding to the scenario. It's what you always do when you argue your point.


I'm trying to learn something. I'm just a dumber plumber. I really don't know much about taxes and I don't pay much attention to trying to save money or get write-offs. I probably lose a fair amount by not paying attention and I probably save a fair amount by not paying my CPA $350 per hour for working the system and attending audits. Anything more than adding and subtracting over-taxes my mental capacity.

Thank you very much.


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## TNTRenovate (Aug 19, 2010)

pcplumber said:


> I'm trying to learn something. I'm just a dumber plumber.
> 
> Thank you very much.


There was no question in your response, you were actually answering a question, but adding to the scenario to make your point.


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## TNTRenovate (Aug 19, 2010)

Spencer said:


> Yeah. I'm about as qualified to talk about this stuff as a snowman.


I know enough to be dangerous and probably am wrong about much of what I am saying, but it is what I have read, researched and been told.


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## Warren (Feb 19, 2005)

TNTSERVICES said:


> I don't follow. If I pay too much how would a new W4 remedy it? I could have a bad fourth quarter and that would change my rate. A new W4 would allow me to change my exemptions, but I don't see how it would help otherwise.


Changing your exemptions would change the withholding. Obviously, if your situation changes a gain, you might want to make further adjustments. The deductions and adjustments worksheet from page 2 of the W4 will guide you through this.


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## kiteman (Apr 18, 2012)

Spencer said:


> This is new territory for me. I was under the impression that you always pay the exact 15% tax rate if you are in that bracket. So if my gross weekly check is $1000 I'm paying $150 for federal income tax. I didn't realize your hourly rate made a lick of difference...???



If you are married filing jointly, 10% on the first $18,180, then 15% on the excess up to $73,800, then 25% on th excess up to $148,800,..... 

Half those numbers for singles which puts Rob's example in the 25% bracket.


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## kiteman (Apr 18, 2012)

Remember the deal with John Edwards? This is actually where I learned about the S corp distribution. He paid himself a salary of about $400k and distributions like $4 million to save the 2,7% Medicare tax.


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## TNTRenovate (Aug 19, 2010)

Warren said:


> Changing your exemptions would change the withholding. Obviously, if your situation changes a gain, you might want to make further adjustments. The deductions and adjustments worksheet from page 2 of the W4 will guide you through this.


Only if you are not already claiming the max.


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## Warren (Feb 19, 2005)

TNTSERVICES said:


> Only if you are not already claiming the max.


While that's true, I can tell you that 95% of people do not bother with anything on a W4 besides page one. In 20 years of running my business, not once has an employee ever redone a W4. I have not redone mine either, even though both of my kids are now over 18, and one is married and no longer lives here.


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## hdavis (Feb 14, 2012)

Once you get it all figured out, it'll get changed.:whistling


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## bdog1234 (Feb 25, 2008)

overanalyze said:


> You just can't have more distributions than salary dollars. They say you should be getting a salary comparable to someone in your area performing similar tasks.


This is not true. Your salary has to be reasonable but what your distributons are doesn't really matter that much. My salary has been 36k for the last 8 yrs and I routinely make six figure distributions each year. The money my business makes is not due to my work per se in a salary sense rather it is due to the investments we have made in the business. Think about it you should not be paying yourself a salary and the payroll taxes associated with it for money your business makes off of work your employees do or income from equipment you have. 

Now if you were a lawyer or a consultant and all your income was due to the work you personally did it could be argued that your salary needed to be high relative to the whole business income but in my case I have nearly a million dollars worth of equipment that I have purchased for the business over the years. I can and should expect a reasonable return on that investment and it doesn't have to be paid to me as a salary.


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## overanalyze (Dec 28, 2010)

Very valid points bdog!


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