Recording Adjustments through loan to shareholder

[equinecpa]

I"m working on an S corp return tonight. The shareholders use a large portion of their home for an office. It was a sole proprietorship business until mid 2008 and then organized as an LLC with S-corp status election filed.

The shareholders have their mortgage payment automatically drafted out of the company account (they know they shouldn't, but haven't changed it.). I journal this out each year through an entry to due/from shareholder.

My intent is to then enter their true office in home reimbursement for utilities. I will also need to journal entry in their mileage on their personal vehicle for the year.

My question: Is recording these entries via journal entry a problem? Does anyone know of any cases where the IRS has disallowed deduction made in this manner? I believe the clients are within the letter of the law doing this but just thought I'd verify.

Carolyn

[Lion]

Plan?

Has the board voted an accountable reimbursement plan? Do the employee/shareholders submit timely expense accounts? Did the company not write them reimbursement checks so you are doing JEs now?

[equinecpa]

It's an LLC electing so no board no real shareholders when you get right down to it. Reimbursements -well they have already taken out more than they should via mortgage payment...I have made the spreadsheet for the expenses to support the deductions...but there won't be checks.

[Gretel]

I think if audited this can easily be questioned because the requirements for an accountable plan are not met.

[equinecpa]

I think if audited this can easily be questioned because the requirements for an accountable plan are not met.

Assuming the company has a written plan in place, what requirements does it fail? Their accountable plan requires at least an annual submission (they have done that). IMO they have been paid (credit to shareholder account).

Is offsetting a due to/due from shareholder account or booking a capital contribution entry not considered payment? ( For those bothered by the mortgage payments through the company books...I reclassify those to distributions).

[BHoffman]

equine - I would be more concerned about using the "loan to shareholder" account. If you were to treat the nondeductible amounts as distributions instead of loans to shareholders, would that result in distributions in excess of basis subject to capital gains tax? If so, I think the IRS would be looking at that issue more closely than reimbursements for OIH and mileage.

[Gretel]

Assuming the company has a written plan in place, what requirements does it fail? Their accountable plan requires at least an annual submission (they have done that). IMO they have been paid (credit to shareholder account).

Is offsetting a due to/due from shareholder account or booking a capital contribution entry not considered payment? ( For those bothered by the mortgage payments through the company books...I reclassify those to distributions).

TTB has guidelines about time frames they I deem to be authoritive. I don't know if an annual submission is good enough. I also would be concerned about the actual amount paid to shareholder or on behalf on shareholder is not the same as submitted expenses. I rather be on the save side and I make my shareholders follow the procedures outlined in TTB.