Discussion Archives:Help! Exp not paid from S Corp Acct

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Discussion Forum Index --> Advanced Tax Questions --> Help! Exp not paid from S Corp Acct

Discussion Forum Index --> Tax Questions --> Help! Exp not paid from S Corp Acct

Heathermarie (talk|edits) said:

19 May 2012
I am preparing the tax return for an S-Corp that has no income and paid only the franchise tax out of the business account. His bookkeeper listed expenses such as Fuel, Truck Insurance, Internet, Contractors Bond, and telephone on a piece of paper saying these were business expenses paid from his personal account. I am simply doing the tax return, but I will be sending the balance sheet and P&L to another CPA that will do the Review that is required for his Contractor's License. I don't do Reviews because I know nothing about them and can't afford the liability insurance. My question is: What do I do about these expenses written down? Do I add as PIC? Also, there is concern that contracting board won't renew the contractor's license so no income and over $4,000 in depr and expenses. Can we just choose not to deduct these? Really, I think the cell phone, etc is just a prorated amount of his whole bill. Nothing actually in the S Corp name..... It's a mess, but he has to get the review done. How would someone doing a review look at this? Thanks for any help.

Ckenefick (talk|edits) said:

19 May 2012
Typically, the contractor's license is based on net worth, working capital, or some similar metric. They are trying to make sure the guy has enough assets to cover the job if things go wrong. Anyway, these personally paid expenses have no impact on net worth, working capital, etc. They'll hit APIC and then run through the P&L (assuming all are fully/immediately expensed and none get capped) and in turn run through Retained Earnings. So equity goes up and then right back down again. If you don't feel comfortable with it, give the Reviewer your financials with a cover letter explaining the situation and how you handled it.

Heathermarie (talk|edits) said:

19 May 2012

Can you tell me what information the CPA that will be doing the review will likely need? I am only doing a compilation for management use only-income tax basis with no disclosures. Is this acceptable? I assume that I will need to give the compilation to the client to take to the other CPA. I do have a peer review, which is why I say management-use only.

Taxea (talk|edits) said:

20 May 2012
Your client should be preparing a "loan to business" note for business expenses paid out of personal account. That way the expenses can be taken by the business and the loan can be paid back with interest when the business is financially able to do so.

Smokeytax (talk|edits) said:

20 May 2012
Here's a great discussion on the issue, including comments from JR1:


Podolin (talk|edits) said:

20 May 2012
Taxea, your answer is more applicable to a C corp situation. The OP's client is an S corp, so I think just showing APIC is adequate.

Spell Czech (talk|edits) said:

20 May 2012
Len, are you saying that the mechanical requirements for this transaction to be able to stand up under scrutiny are somehow *less* for an S corporation than for a C corporation? I will be surprised if that turns out to be the case. Draw, Partner...

Mufid (talk|edits) said:

20 May 2012
First to Smokey, Thank You and I read "all" of the 9 pages before entering this fray. :)

I am preparing the tax return for an S-Corp that has no income and paid only the franchise tax out of the business account

I am not sure of what value the S-Corp is to this "owner," have to have a Lawyer come in here to discuss "alterEgo" and piecring the corporate shield.

But that aside, This return will stand, on its face, even with the outside expenses "booked"

as one not yet in operation and these "expenses" really being "Prepaid" Amortizable in the future Start-Up_Costs.

I provide CPA "attest" servies to clients in the construction industry, Audit & Reveiw. I believe as GAAP stated a TRUE "Compilation" is not what my clients come to me for!

A "Review" Report for this company, for what - There is no Revenue, thus from what the F/S states there is no Business for Profit Activity.

ALL of the above really is not the OP question. Heathers question is S-Corp (or any entity separate from a Sch C & "Owner") "these were business expenses paid from his personal account"

Without providing all the IRC sites, expenses are deductible, by the taxpayer, an individual and his/her Sch C of course, but an owner of an S-Corp? They are TWO separate taxpayers, well except for the "flow-thru-taxation.

This is always a problem for small business owners, not "acquainted" with Civil & Tax LAW.

[oh, and to PVVCPA {Paul} Reply-14 in Smokey's prior discussion cite above, "Quote~I get the feeling from some of my clients that they wish I did NOT know the rules. I wonder if these clients instead prefer incompetent preparers" Yep! Just don't keep really serious clients like that.]

The Credit Cards, I do not have the same problem with, because for a small "Corp" the Bank is not going to issue the Card in the Corp NAME.

The Credit card becomes a problem when it has Personal & Corp charges on it.

I try very HARD to educate my clients as to the need to make ALL Corp expenses OUT of CORP Bank Accounts, even to when they do this by "check" to have them carry a small check book (just like personal ones) in the Corp name. Then there IS the debit card FOR the Corp Account.

EVEN IF the IRS did NOT care, in an audit of the Corp it would require going through the Personal BANK ACCOUNT(S) ouch!

Whether expenses (excluding Credit Card charges) are "booked" as a Loan from Shareholder or Paid-in-Capital does not change the fact that on a cash basis tax return these "expenses" HAVE "NOT" BEEN PAID and thus are not deductible.

Since they were incurred, and paid for by the separate owner there is a "Liability" to the owner and a M-1 Adjustment on the S-Corp.

Heather, just be glad the CPA's attest "Review" report is NOT your responsibility. As to what that CPA will need is up to he/she but at least your compilation report and the general ledger.

Podolin (talk|edits) said:

20 May 2012
Reg. 1.83-6(d) allows a transfer of property from a shareholder to an employee or independent contractor for services provided to the corporation to be deemed a capital contribution by the s/h and a payment by the corporation. I think there is a decent argument (that's a standard I just made up, unless I saw it somewhere) that the same principle can/should apply to any corporate expenses paid by a shareholder on behalf of the corporation. That is pretty much how I read Ckenefick's first posting above.

Len, are you saying that the mechanical requirements for this transaction to be able to stand up under scrutiny are somehow *less* for an S corporation than for a C corporation? I will be surprised if that turns out to be the case. No, Spell, I am saying that there is less of a need for formal loans from s/h in an S corp., because they can draw out APIC as return of capital, whereas there is usually dividend treatment in a C corp. having said that, there are obvious fact patterns where an S corp. loan makes sense. Examples might be where there are more than one s/h and only one makes the loan, or the S corp wants to be able to repay the loan but leave in undistributed earnings.

Spell Czech (talk|edits) said:

20 May 2012
Whew. I was really nervous that you were going to tell us that there are bookkeeping rules that differ between S corps and C corps for expenses paid by the officer/employee/shareholder "on behalf of" the corporation. I'm reassured, hearing that the overall ambiguity applies equally to both.

MP-JD-LLM (talk|edits) said:

22 May 2012
I checked the guru, James Eustice, who is gone but whose wisdom lives on.

According to B&E you should determine whether there is an expectation of reimbursement. If there is, the payment of expenses by the shareholder is treated as a loan to the corporation. See ¶504.1. If there is no expectation of reimbursement, the payment is treated as a contribution to capital. See §3.13[1]. Unfortunately, Bittker & Eustice provides little or no authority for the second case.

Ckenefick (talk|edits) said:

22 May 2012
3rd Option, which is the one the IRS may choose: If there was an expectation of reimbursement, the accountable plan rules have been violated, so there's no deduction to the corp b/c corp didn't reimburse the expense proximate in time (60-days) to when it was incurred. And, to boot, shareholder gets no 2% 1040 deduction because the corp "would have" otherwise reimbursed it.

4th Option, which is another one the IRS may choose: If there was no expectation of reimbursement, the shareholder will have 2% deduction on his 1040...subject to the 2% floor and subject to an AMT add-back.

I'm just playing devil's advocate here. I've never liked recording corporate expenses with journal entries and for good reason: The IRS can make all kinds of "somewhat" valid arguments to dispute such treatment, including those above and including "the corp never wrote a check."

But, as an advocate for the taxpayer, I'm with Eustice on this one.

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