By Karen E. Klein Q: We started an S-corp recently and are trying to understand our tax return from last March. On the balance sheet, our accountant listed a figure under "loans from shareholders." Does this refer to the regular business expenses, or items that the business is technically "buying" from us (tools and a truck that we owned before we incorporated and are now using in the business)? Are we allowed to take an "owner's draw" for that amount? If so, would it be taxable on our personal income for this tax year? I'm hoping that you can help. Our accountant is not exactly the easiest person to ask these questions -- he acts as if we should already know. -- S.L., Freeport, Ill.
A: Let's start with the easy part. Your accountant has included the balance-sheet notation "loan from shareholder." This indicates that you have indeed put in cash and assets the corporation is currently using. "You're sort of on the right track with the idea that the corporation 'bought' these assets from you," says CPA Danielle M. Hewitt, of Keyhan Hewitt Accountancy Corp. and the Invisible Accountant. You can have the corporation pay back the amount listed on the balance sheet, noting on the check "repayment of shareholder loan," Hewitt says. After the corporation has repaid the loan, any additional money you take out is basically an "owner's draw" -- although, in an S-Corp, the proper terminology would be, "shareholder distribution."
Now to the larger question, the one you raise implicitly. There's no question that most accountants are busy people, even outside of tax season. But when a CPA does not have time to answer a simple and reasonable question from a client -- especially a startup entrepreneur -- something is wrong. Explaining the balance-sheet notation, and the basics of taking a distribution from your corporation, should be routine and easy take very little of your accountant's time. The fact that you are intimidated about approaching him means that something about this relationship needs to change.
"You may have hired a CPA firm with a higher tier of fees," Hewitt guesses. "When this occurs, the CPA is glad to do a simple tax return and charge fees, but doesn't want to be bothered with giving free advice to such a small client." If you've hired a large accounting firm and aren't getting personal time and attention because your corporation is considered "small fry," you may want to consider hiring a smaller firm or a sole proprietor.
TIMELY ADVICE. Accountants in these kinds of firms are likely to handle mostly small companies and individuals, so they are used to being approached for advice. And since these clients make up the bulk of their practice, they're more likely to be tolerant and helpful, especially (if they're smart) toward the small companies whose growth may well provide additional income down the road.
If your CPA is a partner in a small firm or has his own practice, you should definitely seek another professional, Hewitt advises. "He is either too busy to manage his client base, or doesn't see the value of his clients feeling comfortable enough to call him," she says. "I tell all of my clients to call me with any questions. I tell them I am not an attorney and they will not receive invoices unless the call takes over 15 minutes. They can usually get a lot of advice in less than 15 minutes."
Along with providing a client service, the free phone calls are invaluable to her accounting practice, Hewitt says. "When I think of some of the questions that I have fielded, and what could have come to pass during tax season when clients would have otherwise come in with a 'done deal' that I couldn't have unraveled, I honestly shudder," she says. "My clients feel very important when I take and return their calls with quick responses, answer questions patiently, and thank them for calling."
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