From TaxAlmanac, A Free Online Resource for Tax Professionals
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Business expenses deducted as employee exp
Mltax (talk|edits) said:
| 20 December 2006
|
| A clients business was unable to pay for expenses through the business so the owner paid the expenses personally. The client recorded these expenses on his personal return as Unreimbursed employee business expenses. The IRS dissallowed these expenses due to the fact that the company had a policy to fully reimburse all expenses incurred for corporate benefit. They further state that the company is a seperate legal entity so income and expenses could not be comingled. Their standing is that the expenses were not necessary for the taxpayer to incur. My question is, since the corporation was not able to pay the expenses(no cash in the business) and the owner paid them personally could he deduct these on his personal return? I believe these were necessary for the taxpayer to pay to keep his business afloat.
|
PJLCPA (talk|edits) said:
| 20 December 2006
|
| Mltax, I think that you'll get better responses to you questions if you fill out your profile.(It's nice to know who we're talking to!) I generally tell the client to make sure that they keep business separate from personal, and not pay any business expenses personally. What he could have done is to loan the money to the business, and then the business could pay him for his business expenses. Make sure then loan is documented, and states repayment terms etc.
|
Death&Taxes (talk|edits) said:
| 20 December 2006
|
| IRS is going to win this one; without doing lots of research, I am sure there are many cases that back their position. I have been on the wrong side at least twice on audits. What PJL writes makes great sense especially if business was S Corp. A loan to the company to pay these expenses would increase shareholder basis, then the payment of the expenses would increase S Corp loss. Client would realize as S loss his percentage of ownership.
|
DZCPA (talk|edits) said:
| 20 December 2006
|
| OLD company policy is not being followed. Accordingly,get a copy of their NEW company policy that shows they do not reimburse expenses if they have no money. Show that to the agent.
|
Taxref (talk|edits) said:
| 21 December 2006
|
| This was an issue in the first audit of a corporation I ever handled. Expenses paid by a shareholder on behalf of a corporation are not deductible by the corporation; they are instead added to the shareholder's basis. While it didn't come up in that audit, that same concept would prevent the costs from being deductible by shareholder personally. I have to admit those rules surprised me, so I was glad I wasn't the person who prepared the original return. I had, however, prepared other corp returns using the same incorrect methods. After that I became a stickler for loan papers, the corp pays the bills directly, etc. That paid off in a later audit of a different client.
|
Mltax (talk|edits) said:
| 28 December 2006
|
| Thank you all. I agree. I think the IRS will win on this. A loan should have been the proper way. Unfortunately the client will have to amend his personal return and pay the additional tax due to the loss of the employee business exp.
|
Gosix (talk|edits) said:
| 28 December 2006
|
| What were these expenses paid by the taxpayer? Were they obvious business expenses? Or fringe grey area ones, that were more likely personal in nature with only a minute business expense rationale?
|
JR1 (talk|edits) said:
| December 28, 2006
|
| Makes no diff, Go. A corp owner cannot deduct them on the 1040. They must be reimbursed.
|
Gosix (talk|edits) said:
| 29 December 2006
|
| I know. I just wondered why the hard line stance, and not allowing them to be done correctly with an amended return?
|
Mltax (talk|edits) said:
| 29 December 2006
|
| They are obvious business expenses.
|
Jc (talk|edits) said:
| 30 December 2006
|
| Taxref, I'm shocked by what you are saying. Can a shareholder not submit an expense report and get reimbursement by the corporation, which can then deduct the expenses? That's what it sounds like you're saying, but it doesn't sound true. Did you mean to say "Non-reimbursed expenses paid by a shareholder on behalf of a corporation... ?"
|
To join in on this discussion, you must first
log in.
