Q&A: Paying Back Your Investment in the Studio

9 Jan 2020 · 2 min

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1:54

Donna explains that putting your own money into a small business is an equity contribution with no immediate tax effect. Withdrawing that same amount later is usually not taxable either, but loans and withdrawals beyond what you put in can trigger tax consequences.

Questions this video answers

Equity contribution.

No — the equity contribution is not a tax effect (no immediate tax caused or avoided).

No — taking the equity back out is generally an equity transaction without tax consequence, depending on tax structure.

You cannot take out more than you've put in personally; you cannot take out loan proceeds without potentially having a tax consequence.

Chapters

Desiree at Pictown Artworks. And my question is we're new and we're still self funding. So when we do that, how do we report that money that we put into the business of our 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 cash flow 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 cash flow is absolutely fine. 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. Sam.