When you put personal money into your practice, it's either a loan the practice pays back or a contribution that becomes part of your ownership. Decide which before you move the money, write it down, and tell your bookkeeper and CPA, because the two are recorded and taxed differently.
The two options
A loan means the practice owes you the money. It sits on the Balance Sheet as a liability. When the practice pays you back, the principal isn't income to you, and the practice can't deduct it.
A contribution means you've added to your stake in the business. It sits in equity on the Balance Sheet. There's nothing to pay back. When you take money out later, it's an owner draw or distribution, not a repayment.
Neither one is income to the practice. That's the most common mistake I clean up: an owner's deposit recorded as revenue, which makes profit and taxes look higher than they are.
How to choose
A loan tends to fit when you expect the practice to pay you back on a schedule, and you want that clearly documented. A contribution tends to fit when the money is part of building the practice, like startup costs, and you don't expect it back separately.
How the practice is taxed changes the details. In an S corp, loans and contributions affect your basis differently, and that can matter when you take money out later. Ask your CPA which fits before you move the money.
If it's a loan, write it down
- A short promissory note signed by you and the practice.
- The amount, the interest rate and the repayment schedule.
- Payments made on that schedule, from the practice account to yours.
The IRS sets minimum interest rates for loans between related parties, and a loan with no interest can create tax issues. Your CPA can tell you what rate to use. Interest the practice pays you is income to you and generally an expense to the practice.
In a made-up example, you lend the practice $25,000 to cover a slow summer, at the rate your CPA gives you, repaid over 24 months. Each month, the payment splits into principal, which lowers the loan balance, and interest, which is an expense. Your bookkeeper records it that way, and the Balance Sheet shows exactly what the practice still owes you.
If it's a contribution, record it as one
Deposit it from your personal account to the practice account, with a memo saying it's a contribution. Your bookkeeper records it in equity. This post covers money you put in before opening, and the same idea applies later.
What I'd do this week
- Look for any personal deposits into the practice this year and check how they were recorded.
- For any that were loans, find or write the note.
- Before the next one, ask your CPA whether it should be a loan or a contribution.
Common questions
Can I change a loan into a contribution later?
It can be done, but it has tax effects. Talk with your CPA before you change how anything is recorded.
Do I have to charge the practice interest?
The IRS sets minimum rates for loans between you and your business. Ask your CPA what rate to use and how it's reported.
What about paying a practice bill with my personal card?
That's usually handled as a reimbursement or a contribution, not a loan. Keep the receipt and tell your bookkeeper.
Want every dollar you put in recorded right?
We record owner loans, contributions and repayments where they belong every month, so your profit and your Balance Sheet stay accurate. If that's what you need, apply to work with us.