cancel
Showing results for 
Search instead for 
Did you mean: 
bisho15
Level 2

Handling long overdue owner expenses

Apologies upfront - I'm sure my situation is not unique, but I can't seem to find the correct answer/s.

 

I started up a business back in 2009 with a couple of partners. Around 2013 they went their separate ways and I re-registered the business under my own name as sole proprietor.

 

Since 2013, I have accrued expenses personally on behalf of the business. It has never really made a lot of money so I have not paid back all of these expenses to myself.

 

I still have receipts for expenses incurred since 2013. My questions are:

1) am I still able to claim these as business expenses? If so, how far back?

  • how should the dates be recorded? With their original date, or do they need to be the current tax year?

 

2) How do I handle the accounts?

  • Do I set an owners equity or owners contribution account up? Are these the same thing?
  • Should this be the total amount outstanding and then all expenses are drawn from here?
  • What about prior year expenses already allocated? Can I reallocate these if I've done it wrong?

 

Let's say for example, in 2015 I paid $500 for some equipment, travel and meals out of my own pocket. I've kept the receipts and was waiting until the business had enough funds to pay me back. I now have a running spreadsheet with all of these expenses for each year of business and a enough cash flow to pay some of it back. What do I do?

 

Also, initially, when I setup QuickBooks (in 2018), the amount of the outstanding expenses was recorded as Owners Equity.

 

I thought I understood this process, but keep coming across unanswered questions... TIA!

2 Comments 2
john-pero
Community Champion

Handling long overdue owner expenses

I will start at the end and work backwards.

 

QB is double entry, so your posting in 2018 to owner equity had to have affected another account - and teh hope would be that it was the expenses. If so you are all done, case closed nothing else to do.

 

Rules on meals and travel have changed multiple times since 2018 or even 2013 and it would be improper to expense meals for clients during time it was not allowed - and meals for yourself are hardly ever covered. The correct way to record business expenses paid from personal funds is to record the expense as coming from Owner Contribution. There is no requirement that you ever pay yourself back to recover contributions, it just affects equity.  As it is you are entitled to remove every last dollar and then some (from business borrowed funds) for your own personal use so get past the idea that you somehow have to balance your equity by paying yourself back. If you put in 2 cents and sometime took out 2 cents then that ship has sailed.

 

If you did not expense these charges on the books then properly you can only amend tax returns 3 years back, which is what would be involved if you recorded these expenses when they occurred.  I cannot advise you to simply enter one bill today for expenses from 2013-2020 and post them all as if they happened just yesterday as that would be wrong.

 

But back to my point, if these expenses were booked (and you received the tax benefit) even though paid out of your own pocket, then there is nothing more to do, other than clean up your chart of accounts to have 3 active equity accounts under a fourth summing only account as follows

EQUITY

<<<Owner Equity

<<<Owner Contribution

<<<Owner Draw

 

Post money you put in as contribution and money you take out as draw. Annually on the FIRST day of each new fiscal year move the balances from contribution and draw to the third equity account. Do it on the first so you can run an annual report of totals for the year (if you return draw to zero on 12/31 then you won't have an easy view of total for the year - even though it is of no tax consequence)

 

Retained earnings (your profit for the year) also goes to equity - it is a pass through item and whether you leave the money in the business or take it out also has no tax consequence in your situation.

 

Now the bottom line. Since you can only amend tax returns for the past 3 years, and, as per "rules of the road" the expenses should be booked as of the date they occurred, which might affect those past 3 tax returns - ask yourself this. Is the difference in increased expense enough to change your tax bracket to a significantly lower number that also would cover the added CPA costs (if you use a tax CPA). If you decrease business earnings by $500 in 2019, what affect would that have on your 2019 PERSONAL tax return? In a marginal 10% bracket that amount would be $50. Is that $50 worth the hassle of amending ALL your 2019 returns, not just business but also personal?

 

bisho15
Level 2

Handling long overdue owner expenses

Thanks John! This helps a lot... and as you point out - some of it may not be worth the hassle. I took this over from my partner who hadn't really done much with it to date, which is why it's so far back... I'll take a look as see if it's worth the trouble. Appreciate your advice - thank you!

Need to get in touch?

Contact us