Discussion:How to book S-corp expenses paid by shareholder-employee?
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| + | {{ForumReplyPost|UserID=Death&Taxes|Date=3 November 2009|Text=It could also be that the IRS auditor is saying these were not corporate expenses, but personal ones of being an employee. Maybe it is possible that there was no employment contract, or corporate policy in the minutes, regarding the reimbursement of these and therefore Uncle Sam had no option but to list these as employee business expenses. If there was a policy of reimbursement, and these expenses were booked, then it would become a question of when to deduct them. Kati ably represents her view; I would think as soon as he is finished his period of mourning for the Packers, JR will weigh in on the other side.}} | ||
Revision as of 15:40, 3 November 2009
Discussion Forum Index --> Tax Questions --> How to book S-corp expenses paid by shareholder-employee?
| 28 June 2006 | |
| I discovered that there are many possibilities to account for expenses paid by the shareholder initially by cash or from his personal credit card. Basically, everybody I ask does it differently, it seems. Very confusing. These are the methods I came across:
(1) Employee expense accountable plan reimbursement (2) Vendor invoice (write invoice to corp for the expense) (3) Contribution of capital (4) Deemed reduction of distributions (5) Loan from shareholder I am asking for opinions (supported by facts, if possible), which of these are possible / legitimate / preferable. Here is my situation: The S-corp uses cash based accounting; the expenses (pre-)paid in 2005 by the owner-employee were mostly travel (gas) cost and miscellaneous items (postage for retail items shipped and charged to the personal credit card by the shipper); also some computer items. Total less than $10k which I now want to reimburse myself from the corp account. QUESTIONS: Can I freely choose which method I use? (I want to avoid (5) to keep things simple, unless the deemed interest does not apply for small amounts.) What is the difference between (3) and (4)? I also read that in case of an S-corp and (1), the corporate tax deduction could only be for the year the shareholder personally paid the expense, not in the year the reimbursement took place; is that correct? Is (2) legally possible? Or is it legally really the same as (1), (3) or (5)?? I assume in ANY case and regardless how it is booked, the deduction is always in 2005 because of the S-corp rules, which supersede the cash based accounting rules, is that correct? (Remember the cash flowed from shareholder to 3rd party in 2005, from corp to shareholder in 2006). What is the really "normal", easiest method to book this? While some of these regular expenses I switched now to my corporate credit card, I pay others like gas cost often in cash -> can this be an issue regarding commingling of funds if I do the reimbursement too late? I'm actually not concered about liability issues but only about the IRS voiding the corporation which I heard can occur. Or can I just make a book entry on the date the expense occured (for the shareholder), instead of physically transfering money between personal and corp accounts? | |
| 28 June 2006 | |
| I think that employee expense accountable plan is the simplest. That's is basically the way that I handle my expenses in my accounting practice. I reimburse myself monthly for all expenses paid and my mileage at standard mileage rate. It is simple and it forces me to account for all of it at least monthly so that I don't let it go a year and lose track of things. | |
| 28 June 2006 | |
| Yeah, 1 or some combination of 1 and 4/5 if the company can't afford to or actually doesn't cut a check. Book the expenses, and credit the S/H loan or AAA as is appropriate. Comes out the same way... | |
Mtmckeecpa (talk|edits) said: | 29 June 2006 |
Accountable plan is the best. I tell clients to keep their reimbursed expenses at arm's length. In other words, they should treat their reimbursed expenses with the same scrutiny as if the expense report was coming from an employee with no ownership in the biz. Some do, some don't.
Regarding year of deduction and reimbursement, I don't see a problem with reimbursing expenses incurred by the shareholder in 2004 and taking the expense in 2005 on the S corp. Generally, most folk want to get those submitted and paid prior to year end so they get the deduction. | |
| 29 June 2006 | |
| I concur with #1. Summarize your expenses and then cut yourself a check, including reimbursement for mileage. It keeps the expenses in a neat package. Reduce your distributions accordingly of you're short on cash, but don't just make an adjustment to net the two unless you have to, as the commingling reduces audit ability. | |
| 30 June 2006 | |
| Thanks for your responses!!! I have enough cash, just never transfered it to my personal account as I didn't know how to do it correctly. Your responses are very helpful.
Only one thing in Mtmckeecpa's anwser is contradictory to what I read elsewhere on the web (see citation below; unfortunately I have no publication or source). So, can we please clarify this -- once and forever: Deductable in the year the shareholder paid the expense, or in the year the corp reimbursed the shareholder. Remember: S-corp; accounting method cash, but the latter might not be relevant (see citation). Somebody seems to be pretty sure that S and C are different here - we just have to find out the regulation that says so. I don't care if I get the deduction earlier or later, I just want to do it legally correct, or know whether I have the choice to defer the deduction or not. Thanks! -- Begin citation -- It doesn't matter if the corp uses cash basis or accrual basis. The corp should deduct those expenses in the year that the shareholder personally pays those expenses, as long as the expenses were not paid by shareholder in advance of those expenses being incurred (ie: prepaid). When the corp reimburses the shareholder in 2006 .... the corp will not deduct those expenses again (of course). If the corp was a C-corp, then the corp could only deduct in the year that it reimburses the shareholder (related party rules would apply) regardless of the accounting method used by corp. -- End citation-- | |
| 30 June 2006 | |
| My answer is that you deduct it in whatever year you book it! Seriously. If the expenses are paid in 2005,they can be deducted in 2005 either thru an entry to show the out of pocket expense and a credit to the loan/draw acct. OR if you want to write a reimbursement check, then when you write that check, either 2005 or 2006. | |
| 18 July 2007 | |
| Has any one heard of deducting expenses paid by shareholder for S-Corporation, as a miscellaneous deduction on the shareholder's personal tax return. Even though doing so would lead to an AMT. | |
| 19 July 2007 | |
| I've heard of showing unreimbursed employee expenses that will flow from 2106 to Sch A line 20. This isn't the preferred way to record these transactions because the deduction is subject to the 2% floor, and sometimes Sch A deductions are limited by high income. Read the above discussion for a much better way to record these transactions. | |
| July 19, 2007 | |
| No can do HM. Specifically prohibited. Must be reimbursed by the corp. | |
Death&Taxes (talk|edits) said: | 19 July 2007 |
| The taxpayer cannot pick and choose where to deduct business expenses if they belong to the corporation. There are many cases on point. I will take the easy way out and say, 'do the research.' Only if the expenses are paid by the taxpayer, and are required as part of his job, and his employer will not reimburse them, can they be put on the 2106. This is why on audit of the taxpayer, IRS requests an employer letter explaining the job description and their policies on reimbursement. | |
| 19 July 2007 | |
| Isn't it a lot simpler to list "unreimbured expenses" on page two of schedule E? | |
| 19 July 2007 | |
| simpler? yes. correct? no.
It's real easy to do taxes the wrong way. The reason clients hire you is to do them the correct way. | |
Death&Taxes (talk|edits) said: | 19 July 2007 |
| No, you only do that for a partner/partnership. The officer of the S Corp is an employee and must abide by company policy. And a partner cannot simply deduct his expense on Page 2, Sch E, unless it cannot be reimbursed and unless it is an expense that benefits the partnership. | |
| July 19, 2007 | |
| "The reason clients hire you is to do them the correct way."
I often wonder how true that is. When I explain things like equity mortgage interest or renting to a family member below FMV, I get this feeling from some clients that they wish I did not know the rules. I wonder if clients instead prefer incompetent preparers | |
Death&Taxes (talk|edits) said: | 20 July 2007 |
| Paul: the list would be endless. How many times in this forum have we mentioned that the self-employed or S Employee cannot deduct lodging per diem, or take expenses for a Time Share used for entertainment of employees and customers? And don't get me started on Earnest!
It's questions like these about employee expenses from clients that make me ask, "Did you ever open a corporate bank account?" | |
| 2 April 2009 | |
| What if there are no employees and the shareholder paid for expenses outside of the business? The K-1 was prepared by someone else and is filed (option 3 & 5 can not be booked) . The business has a loss and can not pay owner back (option 2 out). There is no employee accountable plan (no employees, option 1 out). It doesn't appear that the Unreimbursed expenses on page 2 of schedule E is an option. What else is there? | |
| 3 April 2009 | |
| The shareholder is an employee. Therefore, there are employees. Option 1, FTW! | |
| 3 April 2009 | |
| And to be employee-shareholder don't you have to be paid wages? There were no w-2 wages employees of the company. There were two subcontract laborers and she wasn't one of them. | |
| 3 April 2009 | |
| Ncaztncpa a S-Corp with no wages is looking for an audit. I would record the expenses and credit loan payable shareholder. | |
| 3 April 2009 | |
| The problem is I didn't do the business return. Her partner either did the return or had someone else prepare the return. So, I can't book anything. I have her return with a K-1 loss and these extra expenses. I am trying to figure out if she can take a deduction for the expenses she paid on behalf of the business on her return. | |
| 4 April 2009 | |
| I think you would have to follow the rules for Employee expenses, and have a letter from the Employer that these expenses are not reimbursable, etc. What I found interesting in reading the 2006 part of this post, is that you can reimburse for prior year's expenses. I've never done that (well, I HAVE done that, but the expenses were booked in the year they occurred, just reimbursed later). But if you can do that, maybe the corp should just book and reimburse for those expenses in 2009? | |
Supertaxnerd (talk|edits) said: | 8 April 2009 |
| To add to this, I'm a little unsure how to deduct the business use of a computer for an S-corp shareholder. Business use is 65%, and I don't think I can depreciate it (section 179) since it belongs to the employee, even though it's used mainly for business.
Since it's depreciation and she also wouldn't exceed the standard deduction amount if she itemized Form 2106 isn't a worthwhile option. (or is it?) I would normally deduct depreciation on the S-Crop's return, but the computer is owned by the employee, not the S-corp. Your thoughts? | |
| 8 April 2009 | |
| I don't usually do this, but I think you can deduct the business portion of the computer as long as it is more than 50%. You might also be able to take Section 179 on it if you meet the requirements. If it wasn't purchased in 2008, you'll have to use FMV. Understand that if you do this, that portion of the computer is owned by the corp. | |
| 2 November 2009 | |
| Interesting....A client of mine has actually just came out of an S-Corp audit. For the expenses paid the shareholder (the client) not reimbursed, the auditor admantly treated that as Misc deductions on Sch A (which in reality means no tax benefits since it didn't exceed 2% of the client's AGI). The return for the audit year wasn't prepared by me nor did I come to the picture yet. So I think had the expenses by reimbursed along with receipts/invoices, that would have not been an issue. However, in the case of the S corp didn't have the cashflow capacity for reimbursement, can't that still be treated as APIC with legal (etc annual minutes) documens substantion? | |
| 2 November 2009 | |
| I insist on a C or S Corp reimbursing their expense reports. Anything not reimbursed when paid out of pocket goes on the books when the check is cut. It is my firm belief that a corporate employee that has unreimbursed expenses (and won't cooperate in doing the reimbursement) gets stuck with taking them to a 2106 that flows to Sch A with a 2% haircut. Partners have an easier go of it by putting on Sch E page 2 and also potentially reducing income subject to SE tax. | |
| 2 November 2009 | |
| I always put the non-reimbursed expenses of the shareholder into the shareholder loan account. That way it can be paid back and is shown as a liability, not equity.
APIC can't be reduced. | |
| 2 November 2009 | |
| In my head, I hear the voice of an instructor somewhere along the way saying corporate expenses MUST be paid by a corporate check or the auditor can and will throw them out. | |
| 2 November 2009 | |
| Think litigation. Think of a hyena lawyer circling your tent, sniffing, sniffing, looking for how you treat your corporation as your personal checking account. From that small tear, he can rend open your corporate veil. The jackals will soon feast inside the tent. | |
| 3 November 2009 | |
| Interesting - we seem to have two schools of thought on shareholder paid expenses -
A. They can be deducted via booking to a liability or paid in capital account when incurred or B. A check has to be cut from the corporation before they can be deducted I think we've discussed this before, with some of the really capable contributors going with A. But now Hmoy is saying that at his client's audit, the IRS was adamant about disallowing the corporate deduction. Any other thoughts/audit experience? Any one else have any thoughts? | |
| 3 November 2009 | |
| In my view, attempting to book expenses with an entry to a liability or APIC account is tantamount to booking a payable entry which does not give rise to a current deduction under either the cash or accrual basis. | |
RoyDaleOne (talk|edits) said: | 3 November 2009 |
| The answer to this question is very simple and straightforward.
If the item belong to the a corporation and it was paid for by the shareholder on behalf of the corporation then corporation is entitled to the appropriate deduction. This is also true if the shareholder incurred debt, i. e. credit card, to pay for the item. Just as income can not be shifted among taxpayers deductions also can not be shifted. The original question was about expenses paid via the shareholder's credit card, and to those deductions the corporation is totally entitled. The expenses are consider paid via debt, therefore, the deduction lies in the year the debt was incurred. D&T has already covered most of the other relative points. | |
Death&Taxes (talk|edits) said: | 3 November 2009 |
| It could also be that the IRS auditor is saying these were not corporate expenses, but personal ones of being an employee. Maybe it is possible that there was no employment contract, or corporate policy in the minutes, regarding the reimbursement of these and therefore Uncle Sam had no option but to list these as employee business expenses. If there was a policy of reimbursement, and these expenses were booked, then it would become a question of when to deduct them. Kati ably represents her view; I would think as soon as he is finished his period of mourning for the Packers, JR will weigh in on the other side. | |
