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BizIPEsq.
BizIPEsq., Attorney
Category: Business Law
Satisfied Customers: 996
Experience:  I am a business attorney. I represent individuals and companies with all business related matters.
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Owners personal P&L : Back to the return on capital payments

Customer Question

Owners personal P&L : Back to the return on capital payments paid back to the owner from the different entities that he owns. In looking at the Owners personal 2012 P&L , there are $249k in return on capital payments posted as " additional income". These amounts should be posted against the capital accounts , which are on the balance sheet , correct? Am I also correct to say that if this amount is left on the P&L that he would then pay tax on that income?
Submitted: 1 year ago.
Category: Business Law
Expert:  BizIPEsq. replied 1 year ago.

BizIPEsq. :

Hello, thanks again for requesting me

BizIPEsq. :

to confirm that these are in fact return on capital they need to be recognized for each relevant LLC/s-corp as such

BizIPEsq. :

it's not enough to lump them together as each individual company needs to file its own taxes and each individual capital account is separate and apart from the other capital accounts

BizIPEsq. :

you are correct to note that if not properly recognized as capital return they may be viewed as capital gains or worst as ordinary income...

Customer :

They are , however; the owners balance sheet does not reflect the correct amounts for each LLC someone before me decided they needed to create a new set of books and didn't enter the starting balances. As far as I can tell this all money he is being paid back from the initial start of the entities. I'm concerned because his balance sheet accounts are all negative numbers. Is this correct? I'm sorry I just don't know enough about " capital " to understand

Customer :

Personal Accounts
Balance Sheet Standard 06/20/13
As of June 20, 2013
Jun 20, '13
ASSETS
Current Assets
Checking/Savings
Bank of Nevada 12,148.05
Bank of Nevada MMA 553,304.86
Peoples State Bank MMA 12,014.16
Total Checking/Savings 577,467.07
Accounts Receivable
Accounts Receivable 4,404.36
Total Accounts Receivable 4,404.36
Total Current Assets 581,871.43
Fixed Assets
3060-Tioga Purchase 255,915.46
Total Fixed Assets 255,915.46
TOTAL ASSETS 837,786.89
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable
Accounts Payable 5,406.86
Total Accounts Payable 5,406.86
Credit Cards
American Express -3,545.33
Chase Card Services -605.78
Total Credit Cards -4,151.11
Total Current Liabilities 1,255.75
Long Term Liabilities
3060-Tioga Loan 185,704.63
Total Long Term Liabilities 185,704.63
Total Liabilities 186,960.38
Equity
Additional Capital Payment
LLC 1 25,000.00
LLC 2 -20,000.00
LLC 3 -599,015.00
LLC 4 -20,025.00
LLC 5 -74,145.91
LLC 6 -31,500.00
LLC 7 34,999.96
LLC 8 -137,807.00
LLC 9 -9,349.43
LLC 10 -2,828.58
Additional Capital Payment - Other 23,012.58
Total Additional Capital Payment -811,658.38
Opening Balance Equity 1,105,998.15
Retained Earnings 221,650.67
Net Income 134,836.07
Total Equity 650,826.51
TOTAL LIABILITIES & EQUITY 837,786.89
BizIPEsq. :

negative capital accounts are tricky because that could mean that there was a loss in a given year and then you would need to figure out what caused the loss and whether the member has enough basis to absorb the loss. In addition, if these are not single member LLCs then you would also need to at the operating agreement of those LLC to determine if he has the obligation to restore the negative capital account (i.e. bring it up to 0 at least)

Customer :

So , really these should all be classified as loans? They are all single member LLC's and all of them owe him money for the money he invested to start the companies.

BizIPEsq. :

they can either be loans or capital. You need to look at prior tax years as you don't want to misclassify something that was previously already identified

Customer :

For example LLC 3 was originally 945k loan/capital contribution of which they have paid back $345985 booked as "Return on Captial"

BizIPEsq. :

loan or capital contribution are separate categories. The 945k would need to parsed out as to what it was originally (or how it was claimed originally)

Customer :

it was parsed out as "capital contribution" , the only thing different on the balance sheet I sent you is that I have broken down the disbursement by company

Customer :

what a mess

BizIPEsq. :

sounds like a mess...

Customer :

yeh, I have had a headache for the last 3 hours

Customer :

I would think that the way the capital accounts are currently posted is really just a means to track where is his money is , and how much he's owed back before it would be considered income. Right now they all owe him, so when those number get back to 0, then we should be concerned. Does that make sense?

BizIPEsq. :

the companies can return a capital investment to him which would not be taxable but that money should have been recognized in the LLCs tax return as capital otherwise the IRS may treat this as distribution/income

BizIPEsq. :

Thank you for allowing me to assist you

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