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SCORP Contributed Services

SCORP1
Level 1

The owner of an S Corp does consulting work and bills the client. The time is loaded with overhead and fee. Owner does not want any personal payment/reimbursement - prefers to retain the service income in the company.

 These are my questions:

  1. What are the entries to record the owner's expense (loaded time) that will not be reimbursed to the owner?
  2. What are the entries to record the overhead and fee?
  3. Will the above 2 entries allow me to generate invoice through Accounts Receivable and capture revenue too?
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9 Replies 9
qbteachmt
Level 15

What's this mean: "Owner"

Shareholder-Employee...

"does not want any personal payment/reimbursement - prefers to retain the service income in the company."

What's that mean? They get paid through Payroll, right?

"These are my questions: What are the entries to record the owner's expense (loaded time) that will not be reimbursed to the owner?"

The "Owner" is an employee and is an Expense to the corporation because of payroll. The Labor is income if they charge it to a customer.

"What are the entries to record the overhead and fee?"

Again, that would come from Sales. You are asking about Gross Sales, or Costs? Payroll is the Cost. There is no such thing as "fully loaded."

"Will the above 2 entries allow me to generate invoice through Accounts Receivable and capture revenue too?"

What you haven't done is identify this activity. A Discussion, such as:

Either a person contributed their time outside of the business, or they contributed as part of their business.

An S Corp has no provision on taxes for Contribution.

A business can Waive Sales Price. That doesn't make it a contribution. That makes it a 100% discounted sale. Sales Taxes might still apply.

We can't help you generate an invoice, because we don't know the program in use.

You didn't identify if the work was done for a Charity. Like this discussion:

I am a consultant. I get hired for a project for a 501(c)(3). I invoice them In Full. I also give them a credit memo showing I wrote it off. Now they have proof of Professional Support from the community. Meanwhile, I have forfeited a sale.

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"Level Up" is a gaming function, not a real life function.
SCORP1
Level 1

Sorry let me clarify my questions. There is a no payroll. Company owner is a Shareholder. The shareholder bills hours and travel costs for services delivered. However, the Shareholder wants all the service income to stay in the business. Shareholder does not want anything paid to him personally. Wants all the income to stay in the business bank account. 

I know I need to debit travel expense and consulting expense accounts but what do I credit? If I credit a Liability account, then the liability is never going to get cleaned out because Shareholder again does not want any cash payment to himself. So should it be credit to Retained earnings and will that not duplicate revenues?

 

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qbteachmt
Level 15

"There is a no payroll."

You can't do this for an S Corp. An S corp is required to pay Reasonable Compensation to anyone working for the company.

"Company owner is a Shareholder. The shareholder bills hours and travel costs for services delivered."

Which you would still do here.

"However, the Shareholder wants all the service income to stay in the business. Shareholder does not want anything paid to him personally. Wants all the income to stay in the business bank account."

Let's review:

The "income" from sales stays "in the business" because it shows in the financial data. Whether there is also the money still in the bank, or it got paid out as payroll, or it got paid for Rent and Utilities, doesn't change Gross Income.

"I know I need to debit travel expense and consulting expense accounts but what do I credit?"

Nope. What you are asking is the Sale. You make the sale. You also need to honor if there is a sales tax issue. Then, you would write off the sale, if you don't intend to have the customer pay, after all. There is no Debit-this, Credit-that. There is 100% discounted Sale.

"If I credit a Liability account, then the liability is never going to get cleaned out because Shareholder again does not want any cash payment to himself. So should it be credit to Retained earnings and will that not duplicate revenues?"

You really are overthinking all of this.

Under tax form conditions, you see 1 line for Revenue and 1 line for Allowances/Refunds/Write offs.

An employee that doesn't want to be paid for work, is illegally working. The corporation carries the risk of that person performing that work, and the legal requirement to Pay for the work, using Payroll.

Let's try another discussion example:

I run a landscaping company. You work for me. It is an S Corp.

We decide to take some equipment over to a City Park to help make a handicap accessible path. We have normal operating costs, including payroll for you and me. We can not Charge for that sale; or we can Make it and Discount it, which is what you do for a Charity to be able to have proof of Public Support. Or, you and I can do this on weekend, personally, but now the Corporation is at risk; if we roll flat someone's dog or child, the corporation is on the hook.

And don't confuse Gross Revenue or Full Price with donation or contribution. Another example discussion:

You are my employee and I send you to do some work on your own. I have Payroll Cost. The Sales is not a contribution. The Cost would be, but it's already part of my business expense. You don't get to double-dip it.

Even personally, the IRS tells you there is no Cost for Time. If you go mow the yard at the church, you have some value or worth to your time, since you are a professional landscaper, but you just volunteered to mow. There is no Value on your time, here.

Otherwise, what's to prevent you from deciding your tax deduction for contribution  is worth $500 an hour? You can't make up something. It has to have been Incurred.

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"Level Up" is a gaming function, not a real life function.
SCORP1
Level 1

I am going to try one more time! One there is no illegal business here so i would much appreciate not going that route, thank you!

Let me try a rhetorical question with you. You own a registered business with tax ID. The business performs work for a client. The business bills the client for the month of February. 50 hours, $2000K. How do you record that? You want all the $2000 to stay in the company account. You may later decide to withdraw money from the business to pay a business expense from the $2000. 

______________________

I saw similar question on the forum with the answer pasted below and I am trying to validate or see if I can follow the same logic:

For sole proprietors, credit the Owner’s Draw account. It’s located in the Equity section. Create one if it’s not already there.

For partnerships, credit each partner’s investment account according to who paid what. If the investment accounts are not there, create them. They are Equity accounts.

For corporations, I suggest you credit a Shareholder Loan account. If you don’t have a Shareholder Loan account, create one as an Other Current Liability. The firm will need to repay the shareholder for this transaction.

 

 

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qbteachmt
Level 15

"Let me try a rhetorical question with you."

Yes, please. Because we have to be using Terminology to mean the same things.

"You own a registered business with tax ID. The business performs work for a client. The business bills the client for the month of February. 50 hours, $2000K. How do you record that?"

That's a Sale.

"You want all the $2000 to stay in the company account."

This is worded very oddly, and that's why I am trying to help. The use of the word "Account" is too generic. You make a sale of $2000. Are you expecting the customer to Pay or not?

Starting there:

The Sale is recorded as a sale. There is either the expectation of Payment or there will be a Discount given, reducing the amount to be paid to no less than $0.

"You may later decide to withdraw money from the business to pay a business expense from the $2000."

That's not a good way to think of anything related to Cash Flow. What you are now doing is mixing Banking with the reasons there might be funds in the bank. They don't link like you are thinking of it.

Each activity stands alone. Example:

You make 2 sales for $2,000 each. Both Customers only pay Half. You write off the other Half. Now you have $2,000 in the Bank. You do whatever applies with the money in the Bank. It isn't "from" sales. Sales is just Sales. If you make one $2,000 sale, and then adjust it to $0 by a write off or discount, you still have the Sale recorded. You have the Contra-income (contra means "opposite"). You have no new money in Bank.

When a customer pays you, that sale is now the income (and maybe sales tax liability). Whether that money went to the bank or went to landlord, doesn't change Income. It changes Bank; either it all went to bank or it did not.

"For sole proprietors, credit the Owner’s Draw account. It’s located in the Equity section. Create one if it’s not already there." <== Does Not Apply for You

Drop any consideration of Draws. You are not changing anything to do with Equity. Corporations don't give Draws to anyone.

"For partnerships, credit each partner’s investment account according to who paid what. If the investment accounts are not there, create them. They are Equity accounts."

Again, this is Not your issue. Nothing about what you are asking help with is an Equity issue.

"For corporations, I suggest you credit a Shareholder Loan account. If you don’t have a Shareholder Loan account, create one as an Other Current Liability. The firm will need to repay the shareholder for this transaction."

I don't know what was the question where you got that. These three statements seem to relate to increasing equity because of money to Bank; or, for instance, at year end, if you have a 3-person partnership, you would "close out" equity to allocate it to each partner's tracking account for their share of equity.

 

Look at your Title. You used the word "Contributed" but now, it turns out, that isn't what you meant? Contributions have to do with Charities.

The Business has Sales. Your bookkeeping system automatically "closes" income and expense each year to Equity for you. This is Net Income, in QB, and then it is seen as a change to Retained Earnings for the first date of the new year.

That has nothing to do with this: I want to get paid by the client, and leave it in the bank.

Fine. Leave it in the bank. But don't overlook that your Shareholder-Employee is Required to be paid, and paid through Payroll.

And an S Corp is a pass-through Entity. At the end of the year, the 1120S is prepared, the K-1 will be given to each shareholder who then reports the Taxable income on their 1040, even if no one ever took any money out of the Corporate bank. And again, the IRS requires Payroll.

And here's a common scenario I covered in my classroom:

At the end of the year, your Corporation has $100,000 in sales and that gives you $50,000 taxable reporting income. Meanwhile, you put $50,000 into that Building under construction. You still report on pay taxes on the income, even though you have no money in the bank.

Because Bank does not mean Income. It means Money. That's where you keep stating it oddly.

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"Level Up" is a gaming function, not a real life function.
qbteachmt
Level 15

Let me try this example:

You and I form a partnership to find, buy and flip one house.

We both "contribute" our labor to making this project profitable.

Our labor is not an expense to the project. It is going to be one reason the project sells for more than our cost to buy it and to buy the materials.

That is not a Valuation data entry component. It's "invested" and intangible as Time.

Because otherwise, why could you not add a Bazillion $ to our basis and reduce our capital gain or profit?

That's why the IRS doesn't allow you to arbitrarily value these types of things. It has to be Actual Cost Incurred.

Go back to the example of Corporate Work and Payroll.

I pay you for that work. Now we have a Cost. A real, known, cost. Until payroll, there is no Cost for that labor.

Meanwhile, I make the sale to the customer. And now I can do the math of Profit for this job. And next time, I might set that contract for services Higher. That's analysis and management.

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"Level Up" is a gaming function, not a real life function.
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SCORP1
Level 1

This is good discussion. I really appreciate. I am going to speak with the company tax accountant and get their input as they will be handling the tax filing at year end. 

Sorry for the use of the word 'contribution. That must have confused my question. The work is sales and I agree that the service performed generated sales revenue. No issue with that. The business owner does not want to be 'employee or consultant.' So I assumed no expense to record. Just pure A/R and Sales Revenue and that is it. But at the back of my mind, I am feeling there has to be some expenses to record in QB. This is why I raised the question. Maybe I am over thinking it!

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qbteachmt
Level 15

"The business owner does not want to be 'employee or consultant.' "

This person will benefit from some review, because he/she seems wrapped up in Semantics and need to understand Facts,.

By forming an S Corp, by definition, he/she put themself into the position of being the Employee of that S Corp. Forming an S Corp = I want to have my business Entity be separate from myself.

Otherwise, you would operate as a Sole Proprietorship. So, perhaps someone else gave some bad guidance, here? Why is there an S Corp?

The IRS requires Reasonable Compensation through Payroll be paid to the people doing the work of the business. I cannot state that every time, and have someone try to justify not following the rule. You can ignore this, but then the IRS comes calling. You recall your position of Equity? Once they see Draws (an error, for corporate structure), or Distributions, or never any funds taken at all (as in your first question) and the amount "left in the business" they have the right to declare it All as "should have been payroll" and "you attempted to avoid payroll taxes" and that is illegal and that is subject to tax and interest and penalty.

You might not be afraid of the IRS, but I am.

"So I assumed no expense to record."

Bad assumption.

"Just pure A/R and Sales Revenue and that is it."

AR is unpaid sales for the date of the sale. If you are using QuickBooks, for instance, a Sale is made on a Sales Receipt when it also is paid that same date. Example: I do your work and you pay me through PayPal = no Invoice and not AR. Income is the activity, resulting in money in the PayPal Bank.

Or, I invoice you and you will pay me next week. That's why AR exists = different date for the Sale than for the Payment. Sales = AR. Then, Payment clears AR and creates money to bank.

"But at the back of my mind, I am feeling there has to be some expenses to record in QB."

Yes: PAYROLL.

But for me, a Sole Proprietor, Nope. Well, I am incurring Internet charges.

"This is why I raised the question. Maybe I am over thinking it!"

You have to know what is an Incurred Cost, and what is a Value or Worth, but not Real Cost.

This is a common misunderstanding:

Let's be partners in house flipping. I don't do labor. I put in the Money. We need $100,000 startup funds.

That isn't Cost. That's Equity, my contributed capital. Or, I loaned it to the Partnership, which now has the Liability and needs to repay me, because you have no money to put in, so that is very lopsided for Equity. Let's make it Loan, not Capital Equity. It reduces Equity, because our partnership now is in debt to me.

Do you know how to read a Balance Sheet:

Asset (bank) $100,000

=

Liab $100,000

+

Equity $0

That's Partner Loan.

 

Or:

 

Asset (Bank) $100,000

= Liab $0

+ Equity $100,000

That's Paid In Capital.

 

Now you put in Work. You know this as Sweat Equity. Let's pretend you figure your time is worth (intangible value) $100 an hour and you expect to take half a year working full time to get this flip done. That's 1,000 hours. You see this as $100 X 1,000 = $100,000 or equivalent to my Money.

But it's not. It's not even an Expense. But it is Invested in the project and makes the project successful and we get Profit. Neither my money nor your time are Costs.

My money in the bank (asset) is used to buy materials for the job (assets, as Work In Progress). Even when we spend all the money in the bank, there was No Expense. This scenario is the difference beteeen Expense and Expenditure.

And your Time, as Sweat Equity, is what got us More Profit. There is no Cost. You are not on payroll. You and I are in a partnership. You cannot be your own Employee.

Unless we decide to file the papers to elect S Corp Treatment for our LLC partnership. If we do this, we are both shareholder-empoyees. We both need to get paid through payroll. But now, you realize this type of operation (flipping houses) might not have any money coming in for long stretches of time. See why S corp is not a good business entity type for this business model?

As for "not consultant", duh. Like that is a badge of dishonor or disgrace or something? If you are not an independent contractor Consultant in your line of work, for a service industry, then you simply need a different Label. You might even have some sort of Certification: Consulting Engineer. Accounting Wizard. Architectural Designer <== Not Licensed

Vs

Architect <== Licensed

You both need some good guidance and some discussion time with mentors, I think. This is the exact stuff I taught in my QB classes, because I found the people coming to my QuickBook classes had a lot of wrong concepts.

I was supposed to teach Payroll as a 15-minute session. I saw a need so great that I was proud when I got it down to a 6-hour class.

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"Level Up" is a gaming function, not a real life function.
SCORP1
Level 1

Thank, I appreciate all the feedback and the questions raised. Very helpful. Will discuss with business owner and the tax accountant and if there is any lingering question, will come back, if okay for this forum. All the responses provided has been extremely helpful.

 

Thank you!

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