S-Corp Expenses

[Bees Knees]

Again, I never said you violated any ethics. And I never said what you suggested would violate any ethics. I used the ethics comment in connection to carrying it one step further than what you said…that being having the client go back in time and re-write history, pretending he followed all the rules…

My interpretation of this situation is that the client did not follow the accountable plan rules. You seem to think he did. The original poster does not seem to want to jump in at this point and straighten out our miss-understandings. So you and I are simply talking a lot of what ifs here.

I also agree with you 100% that we are not auditors. We take the client’s word for it. If it were my client, I would explain the accountable plan rules and then ask, “Did you follow these rules?” If the client says he did, then I would give the client the benefit of the doubt and give him the favorable tax treatment for following the rules.


My interpretation, though, of what the original poster said was that the client did not follow the rules. You seem to think he did. Without more facts, neither of us know. I guess this is all the further we can take this one. I look forward to our next argument.

[OldJack]

Again, I never said you violated any ethics. And I never said what you suggested would violate any ethics. I used the ethics comment in connection to carrying it one step further than what you said…that being having the client go back in time and re-write history, pretending he followed all the rules…

My interpretation of this situation is that the client did not follow the accountable plan rules. You seem to think he did. The original poster does not seem to want to jump in at this point and straighten out our miss-understandings. So you and I are simply talking a lot of what ifs here.

I also agree with you 100% that we are not auditors. We take the client’s word for it. If it were my client, I would explain the accountable plan rules and then ask, “Did you follow these rules?” If the client says he did, then I would give the client the benefit of the doubt and give him the favorable tax treatment for following the rules.


My interpretation, though, of what the original poster said was that the client did not follow the rules. You seem to think he did. Without more facts, neither of us know. I guess this is all the further we can take this one. I look forward to our next argument.

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I agree with your approach. Either the S corp owns the cell phone and pays the expense, or the S corp reimburses the employee under an accountable plan to pay the expense. Taking money out of an S corp to pay an expense the S corp isn't liable for is a shareholder distribution, or a reimbursement under a non-accountable plan.

Your advice clearly offered no exception other than charge the shareholder with shareholder distribution if the expenses were not under an accountable plan. The expenses were clearly paid for by the corporation and may or may not be deductible which is irrelevant to the fact that they should not automatically be charged to the shareholder. Again, you imply that a corporation can not incur expenses that are not deductible. You also ignore that the personal calls may be "de minimis" as they would be for your secretary to call home from your business land line to check on the kids.

I did not say he did or did not follow accountable rules, rather, there was no need for a written accountable plan. An accountable plan or accountable rules was not even an issue as the corporation paid for everything... not the shareholder. Again, only you think I was suggesting the client go back in time to do something. Do you understand what an "accountable plan" is and how it is used (not to be confused with proof documents)?

[Bees Knees]

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Your advice clearly offered no exception other than charge the shareholder with shareholder distribution if the expenses were not under an accountable plan. The expenses were clearly paid for by the corporation and may or may not be deductible which is irrelevant to the fact that they should not automatically be charged to the shareholder. Again, you imply that a corporation can not incur expenses that are not deductible.

If a corporation pays an expense it isn't liable for, it is a shareholder distribution. That does not mean it cannot incur a non-deductible expense.

There is a difference.

For example, if a corporation were to incur a meals and entertainment expense, 50% is deductible, and 50% is nondeductible. The S corp would pass the non-deductible portion through to the shareholder as a non-deductible expense.

If a corporation were to pay an expense it was not liable for, such as going to the grocery store and buying groceries for the 100% shareholder, not only is that not deductible to the corporation, it is considered a distribution to the shareholder, since the shareholder was using the corporation checkbook to pay for a personal expense.

Likewise, if this shareholder OWNED the cell phone (that is, the shareholder bought the original phone and service plan), but then had the corporation pay the monthly bills, it would be considered a shareholder distribution, absent an accountable plan. Without an accountable plan, the corporation has no way of knowing whether the cell phone expenses are for business or for personal.

Before arguing any further, you might want to review a few court cases, such as Enoch v. Commissioner, 57 T.C. 781 where expenses paid by his corporation that were held to be non-deductible personal expenses of the shareholder were treated as a shareholder distribution. If the expense is not a business deduction, it cannot be reimbursed under an accountable plan.

[OldJack]

If a corporation pays an expense it isn't liable for , it is a shareholder distribution. That does not mean it cannot incur a non-deductible expense.

There is a difference.

For example, if a corporation were to incur a meals and entertainment expense, 50% is deductible, and 50% is nondeductible. The S corp would pass the non-deductible portion through to the shareholder as a non-deductible expense.

You keep changing the subject. We were not discussing an expense the corporation was not liable for such as personal groceries. In this case the expense was incurred as a business expense on behalf of the corporation by the only officer of the corporation. Right or wrong.. agree or disagree.. the officer liable the corporation when he incurred it as a expense, authorized payment, and paid the same. His intent was clear to pay a corporate business expense in spite of what you might think.

With regards to your example of the 50% non-deductible meal expense. Yes, the non-deductible portion is passed through as an "adjustment to the shareholders basis"... not as a shareholder distribution as you want to do with the cell phone expenses. The same would be true for other non-deductible items such as de minimis phone calls.

Again, I have not been arguing about personal expenses paid by the corporation, rather legal business expenses not deductible by the corporation. You were disallowing all expense, business and in your opinion personal, by incorrectly charging the shareholder with a distribution.

And for the last time, this case was not about reimbursing the employee/officer/shareholder for expenses paid personally under an accountable plan. Read the original post where it says the corporation paid the expenses. A corporation is not required to have an accountable plan for its own expenditures.

[Bees Knees]

Old Jack, YOU are the one making assumptions here. The original poster said:

“I have a client who owns an S-Corp and is the only employee. He uses his cell phone for conducting business and in 2005 the S-Corp paid $3,500 to Nextel. In 2005, the S-Corp did not have an accountable plan. The cell phone is in his name not the S-Corp's name but the S-Corp paid the bill from the S-Corp bank account.

First point: Although he uses his cell phone for business, the poster did NOT say it was 100% business use. Under accountable plan rules, the employee would have to submit a business use log to the corporation so that the corporation could determine the correct amount to reimburse the employee. Nothing in the post indicates the shareholder did this, or even knew about this requirement. The S corp just simply paid the bill without any reconciliation of personal and business use.

Thus, under the facts presented in the original post, it more than likely appears to be a non-accountable plan. Under a non-accountable plan, you treat it as taxable compensation. Do you want to add this to the employee’s W-2 and subject it to payroll taxes? Or do you want to do what the poster and I agreed to and call it a shareholder distribution?

Second point: You also assumed the S corporation paid the original bill where the cell phone was purchased. How do you know this? The poster does not say that. In fact, the poster says it is in the shareholder’s name, not the corporation. So you can’t just assume the corporation owns the phone and is liable for the bill. If a corporation pays an expense that it is not liable for, but rather the shareholder is liable for, it is a shareholder distribution. Do I need to start citing the dozens of court cases that have ruled that way?

[OldJack]

I change my position on that. I agree that if the S corp paid the original bill that included the cost of the phone, then the S corp owns the phone and can make payments.

Seems like you continue to change your mind and draw straws to support your assumptions. Did you not agree the phone was owned by the corporation in this case?

Well... you continue to ignore that the corporation is a separate entity from the shareholder and that an officer of the corporation has authority to incur corporate business expenses without your approval of documentation or assumed lack thereof. Shareholders of an S-corp agree to pay the taxes of the corporation, but that does not include paying for non-deductible business expenses as you in your wisdom believe.

So you have now used the "his" definition instead of "is" thing. I am through with this thread as your mind is locked in the accountable plan that according to you does not exist.

[Bees Knees]

Originally Posted by bees knees
I change my position on that. I agree that if the S corp paid the original bill that included the cost of the phone, then the S corp owns the phone and can make payments.

Seems like you continue to change your mind and draw straws to support your assumptions. Did you not agree the phone was owned by the corporation in this case?

No, I said IF…There is a difference. IF the S corp paid the original bill, then you are correct. IF the S corp did not pay the original bill, then you are wrong to assume it did.

Well... you continue to ignore that the corporation is a separate entity from the shareholder and that an officer of the corporation has authority to incur corporate business expenses without your approval of documentation or assumed lack thereof.

You continue to ignore what I said. No corporate shareholder has the authority to have the corporation pay personal expenses of the shareholder without the shareholder incurring taxable compensation or a distribution.

So you have now used the "his" definition instead of "is" thing. I am through with this thread as your mind is locked in the accountable plan that according to you does not exist.

An accountable plan cannot reimburse personal expenses of the shareholder. You and I cannot tell from the original post if the cell phone was used 100% for business. Therefore, neither of us can say for sure whether this is an accountable plan or not.

I agree, time to move on…