You’ve probably heard of an Owner Draw and that term does get tossed around a lot. If you need a quick refresher Owner Draws, head here. But what is an Owner Contribution? You’ve actually probably made these before and quite possibly never even realized it.
What is an Owner Contribution
Let’s first take a look at the definition of an Owner Contribution. It’s quite literally the exact opposite of an Owner Draw. An Owner Contribution is any time that you pay for business expenses with personal funds or transfer personal funds to a business bank account. So anytime you transfer money to cover other things from your personal to your business, that’s an Owner Contribution.
How Does an Owner Contribution Work
You may have done this when you first set up your bank account. Maybe you needed to transfer some cash in to open the account, but it came from personal funds. That’s an Owner Contribution. Owner Contribution increases the equity in your company just like an Owner Draw reduces the equity in your company.
How Do You Record an Owner Contribution
Let’s say that you’re at the store picking up a bunch of office supplies for your business, and you forgot your business bank card at home. It’s okay. Use your personal card and then go home and record that into your bookkeeping as an owner contribution, because you just spent personal money out of pocket on business expenses. This ensures that you still get the expense on your taxes, but that the money came from personal funds rather than the business bank account.
If you have a business credit card and maybe funds are tight, so you use personal cash to make a payment on it, that is an owner contribution as well because you’re taking personal out of pocket money to pay off a business balance or to pay expenses for the business.
Owner Contribution and Business Taxes
There is no real Business Tax unless you are a C Corporation. Everything for a Sole Proprietor, DBA, LLC, and S Corporation flow through to your personal tax return, making your personal taxes due or tax return, personal cash. If you deposit your tax refund to a business bank account, this is considered an Owner Contribution because that’s personal cash being put into a business bank account.
Were there any of these areas that surprised you? I’d love to hear. Now you have a place to get started to finally get control of your bookkeeping once and for all. You can grab more support and resources for your creative business in my community, Financially Focused Photographers. If you are ready to get your financial sh!t together and makeover your creative business bookkeeping, book a call with me here!
Do you send client gifts?
The IRS has specific limitations on deducting gifts, and it may surprise you.
$25 Limit (yup you ready that right)
The IRS states:
“You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.”
Anything over $25 could be treated as taxable income to the employee or client.
Sure, you can totally spend as much as you want on a client gift, but you can only claim up to $25
To be clear, this is not per gift; this is $25 per person per year.
This limit has not changed since it was enacted into law in 1954.
Good News Though,
The $25 Limit DOES NOT include the following:
This is why I love GREETABL you can easily send a nice gift under $25 the limit.
If you go this route you’ll need to keep record of the gift – Keep a copy of the receipt and make sure it shows who the gift was for. (if not add a little hand written note)
In your accounting software or spreadsheet
(however you keep track of your business expenses)
You’ll want to break this out..
- Gifts (Deductible)
this is where you’ll put the first 25.00 of any gifts with a note telling who it was for.
- Gifts (Non-Deductible)
This is where you’ll put anything over 25.00
(you can totally spend more than $25 you just can’t deduct over the limit)
(remember that does not include shipping, engraving or packaging)
Yes this does get a little intense with paperwork and trackign – but it’s doable if you stay organized.
or you can…
Brand Your Items for 100% deduction!
By adding your logo, you’re now extending the reach of your brand, creating brand awareness, and attracting future leads.
What this means is that the $25 limit no longer applies because you have turned this cost into an advertising expense.
The IRS allows you to deduct 100% of the expenses that assist you in creating new client relationships and increasing repeat business from current clients as advertising. 🥳️
What about gifts for referrals?
One important thing to note here is that a referral gift is technically not a gift
It’s literally payment to someone for sending a client your way and bringing you business.
Any cost you incur to promote your business is 100% deductible as advertising.
Referral gifts DO NOT need to be branded.
So, If you send a $50 Starbucks gift card to all clients who sent you a new paying client, that full $50 is an advertising expense.
There you have it!
Most expenses classified as gifts are not really gifts at all and can be 100% deducted.
Lower your tax liability while, building your brand and client relationships.
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And if you’re ready to get your financial sh!t together for your creative business, contact me here!
Publication 463, Travel, Entertainment, Gift & Car Expenses
Publication 535 (2018), Business Expenses
IRS FAQ: Are business gifts deductible