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How should an S Corp handle business expenses paid for by shareholder's personal credit card or bank account?

Forum|Forum|7 years ago
December 11, 2018
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We recently transitioned from a sole proprietor to an S-corp with 2 shareholders (60%/40%). During the setup we paid for the business expenses using a personal credit card. I added that card (Which I now believe was a mistake) to Quickbooks and entered all the expenses we paid as credit card charges. Now, we have made a payment (paid the full balance due) on the credit card from our personal checking account since there isn't enough money in the business account yet. Here are my questions......

First, I am thinking that I should not have set up that credit card account in QuickBooks since the credit card we have is not a business credit card. Although, we do mainly use it for business expenses, it is still a personal credit card and there are times that we charge personal items on it. So, with that said, should this credit card account be deleted and I create a new current liability account called "Shareholder Loan" (or “Due to Shareholder…or something to that effect) that we can track all the reimbursable business expenses that we are placing on that credit card or paying for out of pocket? So, basically, when a reimbursable expense is paid for by the shareholder’s personal credit card the QB entry would be to debit the appropriate expense account and credit the shareholder loan liability account. Then once a month I will write the shareholder a check to reimburse for those expenses and the QB entry would credit the cash account and debit the shareholder loan liability account. Is that the best way to do it? And this won't look like income correct? Also, do I need to make a shareholder loan account for both shareholders…even if only one of us pays for said expenses?

Next, in regards to the current balance that is in QB now for the incurred expenses that we paid out of our personal account. The shareholder will not be reimbursed by the company for these expenses. What entry do I need to make to reduce the balance for the payment made if he isn't going to get reimbursed? Would this be treated as an owner investment since he used our personal cash for business expenses? If so, should I debit the Shareholder Loan liability (AKA the credit card account) account the full amount, and credit his capital account that same amount? Or would I need to split the investment up 60/40 between both our capital account?

Sorry so long...and confusing!

QuickBooks Desktop

Best answer by Rustler

@ mhanmil

You can not delete anything in QB if there are transactions, that is why I said that, the CC account has transactions, sorry I was not more specific. Yes you can try the delete, will not hurt anything

I am confused as to why I would change the expense accounts on the charges on the CC account if I will be making it inactive….or deleting it. Also, I still need to track the type of business expense and if I change it to Shareholder Loan then I won’t be able to that.

This entry is to move the expenses already entered in the past to the liability accounts as a lump sum.

I would delete all the transactions in the CC account first, then I would delete the CC account or make it inactive. Whichever is best. Then I would set up the 2 current liability accounts and call them “Shareholder Loan, name”. Next, I would reenter all of the previously deleted CC charges using the General Journal. The GJ entries would debit the appropriate expense account and credit the appropriate shareholder loan account. Does that sound right?

You can do that, it is a lot of extra work, but yes you can do it.

Expenses paid, since there are two shareholders, should be separated between the shareholders, not 60/40 but in the actual amounts each paid.
You said originally, Then once a month I will write the shareholder a check to reimburse for those expenses
But now you are saying that payback will not happen. Shareholder additional paid in capital has some restrictions, shareholder capital can not be treated the same as equity accounts in a partnership, I would consult with a tax accountant as to whether you can move debt to additional paid in capital.

RustlerAnswer

@ mhanmil

You can not delete anything in QB if there are transactions, that is why I said that, the CC account has transactions, sorry I was not more specific. Yes you can try the delete, will not hurt anything

I am confused as to why I would change the expense accounts on the charges on the CC account if I will be making it inactive….or deleting it. Also, I still need to track the type of business expense and if I change it to Shareholder Loan then I won’t be able to that.

This entry is to move the expenses already entered in the past to the liability accounts as a lump sum.

I would delete all the transactions in the CC account first, then I would delete the CC account or make it inactive. Whichever is best. Then I would set up the 2 current liability accounts and call them “Shareholder Loan, name”. Next, I would reenter all of the previously deleted CC charges using the General Journal. The GJ entries would debit the appropriate expense account and credit the appropriate shareholder loan account. Does that sound right?

You can do that, it is a lot of extra work, but yes you can do it.

Expenses paid, since there are two shareholders, should be separated between the shareholders, not 60/40 but in the actual amounts each paid.
You said originally, Then once a month I will write the shareholder a check to reimburse for those expenses
But now you are saying that payback will not happen. Shareholder additional paid in capital has some restrictions, shareholder capital can not be treated the same as equity accounts in a partnership, I would consult with a tax accountant as to whether you can move debt to additional paid in capital.

M

mhamil10-mhAuthor

@Rustler - Tips & Tutorials
Thanks so much! You have been very helpful!

"You said originally, Then once a month I will write the shareholder a check to reimburse for those expenses But now you are saying that payback will not happen."
What I meant was that the company isn't going to reimburse the shareholder for the expenses he paid for during June and July (Right now, there just isn't enough money in the account.). However, going forward, the shareholder will be reimbursed for any business expenses paid for using personal funds. Basically, I was just trying to figure out what to do with any leftover balance in the Shareholder Loan account that does not get paid back to the shareholder. Make sense?

Rustler

should this credit card account be deleted and I create a new current liability account called "Shareholder Loan" (or “Due to Shareholder…or something to that effect) that we can track all the reimbursable business expenses that we are placing on that credit card or paying for out of pocket?

Then once a month I will write the shareholder a check to reimburse for those expenses and the QB entry would credit the cash account and debit the shareholder loan liability account.

Yes exactly

but in QB you can not delete an account, create the two shareholder liability accounts, then from the credit card account - use enter cc charges, top left set to credit, then list the shareholder accounts on the expense tab with the respective amounts, save. Then make the CC account inactive to get it off the listings. The CC balance must be zero when you finish.

M

mhamil10-mhAuthor

Thanks Rustler! It sounds like I am on the right track but I am still a little confused……

“but in QB you can not delete an account,”
In Quickbooks, I do have the option to delete an account. If I go to the Chart of Accounts and right click on an account, I get a list of options that include “Delete Account” and “Make Account Inactive”. If I can delete the account, should I?

“then from the credit card account - use enter cc charges, top left set to credit, then list the shareholder accounts on the expense tab with the respective amounts, save. Then make the CC account inactive to get it off the listings. The CC balance must be zero when you finish.”
I am confused as to why I would change the expense accounts on the charges on the CC account if I will be making it inactive….or deleting it. Also, I still need to track the type of business expense and if I change it to Shareholder Loan then I won’t be able to that.
Here is what I was thinking I would do…..I would delete all the transactions in the CC account first, then I would delete the CC account or make it inactive. Whichever is best. Then I would set up the 2 current liability accounts and call them “Shareholder Loan, name”. Next, I would reenter all of the previously deleted CC charges using the General Journal. The GJ entries would debit the appropriate expense account and credit the appropriate shareholder loan account. Does that sound right?

Also, in regards to the current balance that is in QB now for the incurred expenses that we paid out of our personal account. The shareholder will not be reimbursed by the company for these expenses. What entry do I need to make to reduce the balance for the payment made if he isn't going to get reimbursed? Would this be treated as an owner investment since he used our personal cash for business expenses? If so, should I debit the Shareholder Loan liability (AKA the credit card account) account the full amount, and credit his capital account that same amount? Or would I need to split the investment up 60/40 between both our capital account?

Thanks for you help!

qbteachmt

"I added that card (Which I now believe was a mistake)"

You can rename this to "Owed to Shareholder" and now you get to use the Credit Card input tools, but this still is Liability owed to Shareholder. You use this no matter How they paid on behalf of business. and you Stop putting their personal charges here and stop Reconciling or managing this to the card statement. It no longer is a CC account but a Liability account with great Management screens.

"In Quickbooks, I do have the option to delete an account. If I go to the Chart of Accounts and right click on an account, I get a list of options that include “Delete Account” and “Make Account Inactive”. If I can delete the account, should I?"

It won't let you Delete. You have Transactions here. If you select that option, you can see this happening. Never make an account inactive if you left a balance and did not Reconcile to end this account at 0.

"Also, I still need to track the type of business expense and if I change it to Shareholder Loan then I won’t be able to that."

Make it easy; don't change a Bazillion things. Just rename and Repurpose this account.

A

ascend20

I started working with a client mid-summer. He is still completing books/taxes for 2018. In 2018, he was using a personal card for business expenses as well as personal expenses. The previous bookkeeper included this card in his accounts which means all the personal charges are charged to shareholder distribution. Will this method (changing account type liability) work to eliminate the Shareholder Distributions? Payments to the card were made directly from business account and from his personal account. Both personal expense and personal payments were credited/debited to Shareholder Distributions, but there is still a balance in Shareholder Distributions. Would changing the account to a liability affect the Shareholder Distribution transactions? Is there another method to use in order to eliminate a taxable distribution?

C

Catherine_B

QuickBooks allows you to change account types, ascend20.

When you edit an account type from an asset to a liability, balances and transactions will also be affected. A prompt will ask you to confirm if you want to continue in changing your account types. Since, it'll affect your accounting and reporting. Once you've changed the accounts, let's ensure that we also manually change the account you used for the Payments to the liability account.

I also recommend reaching out to your accountant so they can help and advise another method you if changing these account types is a best option for your business preference.

I'll be around if you have further questions with accounting your transactions.

qbteachmt

"What is a cardless credit card function"

Home Depot or Lowes allows you to carry an "in house Charge account" = Cardless. You owe a Shareholder for purchases they make using personal cash or credit card or check = Cardless Lending to you. Cardless = not a actual credit card in your hand.

"or generic value?"

Banking menu > Write Check for Any Amount = Generic repayment. On the expenses tab, post that Shareholder Loan account.

"I have to reimburse owner for equipment on his personal credit card. I have been paying the owners personal credit card directly for business charges- is that okay?"

No. It's a Very Bad idea.

"I prefer not to use journals, but need to track these frequent reimbursements."

You don't use Journals. You use the Functions. You don't pay anything that is Personal, directly from the business. You pay the person, who pays their Own Bills.

Research the word Commingling.

qbteachmt

"What I meant was that the company isn't going to reimburse the shareholder for the expenses he paid for during June and July (Right now, there just isn't enough money in the account.). However, going forward, the shareholder will be reimbursed for any business expenses paid for using personal funds."

Which is the same as a Cardless Credit Card function. You repay them when possible, and that is using a generic value, which is a running balance reduction method = credit card function.

A

arkvalleyinfo

What is a cardless credit card function or generic value? I have to reimburse owner for equipment on his personal credit card. I have been paying the owners personal credit card directly for business charges- is that okay? I prefer not to use journals, but need to track these frequent reimbursements.

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