Taxes And The Personally-Funded Business

    May 6, 2003

Hi Wayne:
I currently work for an aerospace company and run my own business. Can I use my aerospace money to pay for some of my business expenses? I really don’t want the money to be taxed twice, but do I have no other choice?

Michael Onstad
Plug-in Web Services

Hi Michael:

Sounds like you have a very common situation: you work as a W-2 full-time employee, and being the entrepreneurial type, you’ve also started your own business “on the side.” Good for you!

Assuming you are a Sole Proprietorship, it doesn’t really matter where you get the money to pay your business expenses. Taking your W-2 income to fund the business is OK — you are simply putting your own funds into the business. Most businesses (no matter how big or small), get their funding from the following sources:

1. The owner’s investment (which is what you are doing)
2. Loans (from a bank, from friends or relatives, or from the owner(s))
3. Revenue from the business

So, it sounds like you are doing #1. Which is fine, just keep in mind the obvious: If you only fund your business from Source #1 and/or Source #2, you won’t be in business very long.

Eventually, you need to bring in enough revenue (sales) to cover your expenses. Otherwise, you will not be profitable. If you continue to pour your own money into the business year after year, how long can you afford to do that? Your goal should be to make a profit, which means having more than enough revenue to pay all expenses, with some left over. If all you do is use personal money to pay the expenses, then you are running an unprofitable business.

Hope that helps.

Hi Wayne:
So does this mean that the owner’s money is not taxed again with the business If I’m a sole proprietor?

thanks for your time.
Michael Onstad

Hi Michael:

The owner’s investment of money is never taxed. The owner’s money is not income to the business, it’s the owner’s investment of capital into the business.

You are taxed on the business’ net profit: income (from sales) minus expenses.


Wayne M. Davies is author of 3 tax-slashing
eBooks for small business owners and the self-employed. For a
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