Here is the most commonly confused tax issue for business owners, based upon my experience:
Let’s say you and a partner go into a joint business together (Partnership or S-Corp) – you are each 50% partners.
Right from the get-go, business is booming!
In year 1, the business has a profit of $1,000,000.
Both you and your partner decide not to take ANY personal money out of the business, as you want to keep growing the business and don’t want to sap the business of its cash flow.
How much income do you report on your personal tax return?
From my experience, most people would say “Zero.”
No money went from the company to either of the shareholders, so neither of them had income for the year, right?
When you own an LLC/Partnership or an S-Corp, if the company has a profit, you need to report that profit as income.
It’s irrelevant how much money you personally took from the business.
The correct answer is $500,000.
Did you know that?