Wages paid with business loan

[ChiroJesseL]

Hi there, I have a question regarding a single member LLC that used a business loan to pay the owner.

In the schedule C, you can deduct “wages” as an expense, and to my understanding I would put the wage I paid myself in this area. Now, if my business did not have enough gross sales then it shows a net loss due to the expenses. If I paid myself from a business loan how is this going to be documented in my taxes? The business loan does not need to be reported as a sale, so it looks like I would be losing money for the business because the expenses are too high. Can someone help explain or clarify?

[VolvoGirl]

No.  Wages are only for employees you pay.   Sole proprietors cannot take a withdrawal or salary and include it as an expense on their tax return. As a sole proprietor, you are not an employee of the business. You don't pay yourself or enter a salary or withdrawal for yourself. All the business income and expenses are your personal income and expenses in the first place. You just fill out a Schedule C. The net profit or loss is your income.  If you have a net profit of $400 or more on schedule C you will pay SE self employment tax on it in addition to your regular income tax. It's all included on your personal 1040 form.  

(And if you paid yourself and deducted it as an expense then you would have to include it as income on the same tax return so it would be a wash.)

See Schedule C instructions page C-10 for line 26,  right above line 30, Do not include….amounts paid to yourself

http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

[ChiroJesseL]

Thank you for the response.

In regards to paying myself from a business loan, how would this be portrayed in my taxes?

[VolvoGirl]

You don’t mention it at all.   You don’t reports loans received or amounts you withdraw.   

If you are a sole proprietor or self employed, you don't account for cash, money or loans you put into the business. The schedule C is all your personal income and expenses in the first place. Doesn't matter what account the money came out of. It is not income or an expense. You just enter the gross income you received (not loans) and actual expenses you paid. If you paid for something you can take the expense. Doesn't matter how you paid it. You deduct the money you put in to the business by entering the expenses you used it for.

If you got a business loan you can only deduct the interest you paid.  Otherwise you enter the actual expenses you paid with the loan.