When Business Owners Should Pay Themselves
As a business owner, there are several factors that should be considered before deducting money from a business for personal needs. Technically, as the owner, one should be entitled to write a check when needed to pay for personal expenses, but it is not that simple. There are right and wrong ways to pay yourself from your business. Consequences can be imposed if the transactions utilized to pay yourself are conducted incorrectly.
The main principle that should be followed is that all money that enters into a business is to be used for the business. Those funds can be applied towards business supplies, marketing expenses, payroll, website expenses, rent or mortgage. Funds from a business cannot be used to pay for personal expenses such as vacations, personal mortgages or vehicles, groceries etc. If the business is operated out of your home, a part of some household expenses can be paid for from the business such as internet, phone and electricity.
The best way to ensure you are handling your business’ finances correctly is to maintain a separate bank account for the business and seek the advice of a tax accountant. The consequences of intermingling personal and business funds can be devastating and long lasting. Initially, an audit may be requested which would require that all expenses be proven as business related. You would also need to provide documentation to support these claims. If you fail to do so, and you have a C-Corp, the personal expenses would be added back to your tax return and it would be recalculated, possibly at a higher rate, with interest and penalties. If your business is an S-Corp, and the scenario plays out the same, the expenses will also be added back to the tax return, but your personal tax returns will also be negatively affected.
At this point, you may be wondering, how does a business owner collect money from their business without being in error? The best advice is to work with a qualified professionals, such as an accountant and/or attorney who can advise you on how to avoid IRS red flags and maintain appropriate documentation for your tax filings. These professionals can also help your business prepare a budget for revenue and expenses.
If you’re wondering how much is a safe amount to pay yourself as a business owner, understand that there is not a standard percentage that is appropriate for every business. The business must be profitable, of course. You must then calculate an amount that can be deducted while simultaneously allowing the business to thrive and also satisfy your personal needs. If this can be determined, you’ve succeeded in finding the right range. Every year the range can be re-evaluated to regulate if it should be raised or lowered.
As a business owner, one should be able to reap the rewards of the hard work, time and dedication devoted to your business. There is no better way to do this than to be compensated financially. Utilizing the guidelines explained previously, a business owner can rest assured that they are conducting their financial transactions properly and without fear of repercussions.
Understanding and Utilizing Real Estate Leverage To Your Advantage
Real estate can be a profitable endeavor and, when navigated knowledgeably, can ensure a healthy property portfolio. However, this industry also has many risks and requires careful thought and planning, especially regarding real estate leverage. In short, real estate leverage is the process of purchasing property with borrowed funds. By doing so, a buyer can own property without immediately having to pay the total amount of the property upfront.
For instance, when purchasing a home, most people obtain a mortgage to cover the cost of the total amount beyond the down payment they provide. The buyer is leveraging the bank or lender’s funds to purchase the home rather than wait until they have saved the entire amount of the home. While many people are familiar with home mortgages, or variations of loans to purchase a home, some use real estate leverage in other ways.
HELOCs or Home Equity Lines of Credit are a great option for anyone that already owns at least one property that has equity. This type of loan is a revolving line of credit that can be used as leverage to purchase another property. The HELOC can be used to make purchases or pay for other unexpected expenses. Most HELOCs allow minimum monthly payments consisting of just interest. However, it is always a good idea to pay down the principal each month. Another alternative, the Home Equity Loan, is also referred to as a second mortgage which is repaid in a set amount of principal and interest over a designated period.
Some individuals find it worthwhile to pursue private loans through business or personal relationships. As in all transactions, a professional loan contract should be drafted and signed including all the possible outcomes to avoid any possible issues and outline all risks.
Mortgage loans can also be obtained through community banks, rather than utilizing a traditional mortgage lender. Typically, a community bank offers a portfolio loan that it retains in its loan portfolio rather than selling the loan in the secondary market. Portfolio loans are often adjustable rate mortgages, but they may also be more flexible regarding their qualifications, which is appealing for investors with numerous properties. Business owners will sometimes leverage business credit to finance their properties. Businesses have a few more choices than individuals if their businesses have solid financials and documentation, such as applying for an SBA loan.
Once you’ve decided the best option of how to leverage real estate, it can be used to your benefit. Not having to supply the full purchase amount of a property enables a buyer to obtain property in a shorter time frame and in larger quantities. By owning numerous properties, one can expand their real estate portfolio and potential income. Properties can be a mixture of commercial and residential or strictly of one type. The most common way to profit from real estate is to collect rental income that meets or exceeds the expenses of maintaining the property. In the scenario that the rental income covers only the cost of the mortgage, taxes and any other expenses attributed to the property, the gains are received if owned long term. The owner of the property is usually still profiting because of the equity that increases as time passes from the value of the real estate increasing. Once the property is owned long enough, the rental income will decrease the mortgage, therefore providing a profit. In many scenarios the rental income exceeds the costs of maintaining the property and there is an immediate cash flow upon purchase.
There are also risks associated with leveraged real estate. For instance, investors are highly dependent on rental income and that is not guaranteed. At any given time, a business may fail in a commercial property and vacate a space that was providing rental income, or a residential tenant may not renew a lease and it may be difficult to find another renter. Other factors to keep in mind are property repairs and yearly real estate tax increases.
Utilizing real estate leverage isn’t the best option for everyone. Different variables need to be evaluated and considered. Certainly, one must have a tolerance for risk and alternative streams of income would be preferable. However, if it is possible to strategize by leveraging real estate, it can be a potent tool for investing.