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I have an upcoming state tax audit, how do I show money I contributed?
Question : I have an upcoming state tax audit, how do I show money I contributed?
My business shows around $ 5K – 6K income from my personal bank account from where I placed money in to help with expenses. This amount appears in addition to normal sales. I also show $ 4K – 5K leaving my business as a draw that goes back into my personal account. I file Schedule C as a sole proprietor. I did not include this money coming into my business from my personal account as revenue. I also did not include any draws from my business as income on my personal tax return. It’s more like a flow of money between the accounts. Is any of this considered income? If so, where do I report it?
tax audit help
Best answer:
Answer by Ameli
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#2 written by Jesse H 1 year ago
The only thing you consider as income is income. You can’t generate income from moving money around.
If a deposit came from your personal account obviously it’s not income. It’s also generally not an expense when going from a business account to your personal account (unless you’re reimbursing for expenses paid by you personally).
Your business does not show 5-6k income from your personal bank account. It shows 5-6k of contributions to the company made by you. Don’t mix the word income with deposits made to the account.
Draws from your business account are not income on your personal tax return. Income on your personal tax return come from your schedule C. You can take as much money as you want out of your schedule C without any tax ramifications. You are tax on income – deductions = taxable income subject to SE tax.
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Your question is a bit confusing!
You’re a sole proprietorship so you’re taxed on NET income (gross income minus bus. deductions). You are NOT taxed on your draw but you do NOT get a deduction either!
For example…
You grossed $ 20,000 revenue
You paid $ 8,000 in expenses
You took a $ 10,000 draw
Your NET TAXABLE income is:
$ 20,000 – 8,000 = $ 12,000 reported on Sch C, net income!
Your draw is your distribution from your company’s profits so it doesn’t matter as it’s non-taxable but you don’t get a deduction!!
Make sure that the bank accounts show an amount that’s close/exact to the amounts reported on your Schedule C.
Otherwise, you’ll be hit with under-reporting of income and subject to penalties and interest!
Most businesses keep separate bank accounts for business and personal to segregate the earnings/expenses to avoid confusion come tax time for bookkeeping!
Good luck!