Four kinds of owner money
Money moves between an owner and the company in four ways: the owner lends to the company, the company lends to the owner, the owner pays a business cost personally, or the company pays an owner's personal cost. Each is recorded differently. When they are mixed together in one catch-all account, nobody can tell what is owed to whom.
Owner loans to the business
Document a loan with a signed note: the amount, the interest rate, the repayment schedule, and the date. Record it as a liability. Repayments of principal reduce the liability and are not expenses. Interest is an expense and may be income to the owner.
If the loan carries no interest or a very low rate, there can be tax consequences, because the IRS publishes minimum interest rates called applicable federal rates. Ask your advisor before you set terms.
Business loans to owners
A due-from-owner balance is a red flag for lenders, auditors, and the IRS. An undocumented withdrawal can be recharacterized as wages, a distribution, or a dividend, with tax consequences. If the company really lends money to an owner, paper it with a note, charge appropriate interest, and require repayment. If it is not a loan, record the payment for what it is.
Owner-paid business expenses
An owner who pays a company cost personally is owed. Set up a reimbursement process with receipts, a business purpose, and approval, then record the expense and the repayment. Do not run the reimbursement through a vague "owner" account that never clears.
An accountable plan is a set of rules that treats reimbursements as a business expense instead of taxable pay. It generally requires that the expense has a business connection, that the person substantiates it with receipts within a reasonable time, and that any excess advance is returned. A written policy and the discipline to follow it make the difference.
A quarterly check
Every quarter, review the owner accounts. Anything unexplained, old, or large should be resolved: repaid, reclassified, or documented. Clean owner accounts make the tax return simpler and the company's credibility stronger.
Frequently asked questions
Do I have to charge interest on an owner loan?
Not always, but below-market loans can have tax effects. Ask your tax professional what rate to use.
Can I just take money out of the business account?
You can take owner draws or distributions, which should be recorded as such. Taking money without recording what it is leads to problems later.
What makes a reimbursement plan accountable?
A business connection for the expense, substantiation within a reasonable time, and return of any excess advance.