Credit cards and S Corp debt basis..

[outwest]

It's well established that debt basis is created when a shareholder directly loans to the S Corp. Loan guarantees alone do not create debt basis. We also know that, unlike a partnership, a S corp shareholder cannot deduct the corporate expenses paid personally by a shareholder.

So now I have a S corp with losses for 2009. Those losses were funded by credit card charges. We have also determined that the shareholders do not have enough stock basis to deduct the losses.

In talking with the shareholders, we discover that the credit cards are issued personally to the shareholders but used exclusively for corporate purchases. This was done because no cards could be obtained in the corporate name. The corporation has tracked the purchases and payments on the corporate books and has balance sheet liability accounts for the balances on the cards.

The question: Do the cards create debt basis?

In the affirmative:
1. the cards are loans to the shareholder personally.
2. the shareholders have made a direct loan to the corporation by permitting exclusive use of the cards for the corporation.
3. Aside from the tax benefits, there is a business purpose/necessity to having the cards to order materials and supplies and the corp could not obtain on it's own.
4. The corporation has consistently made the payments on the cards.
5. Total below the $25K threshold for open account debt.

In the negative:
1. Possible to re-characterize as shareholder payment of expenses?
2. ???

[JohnH]

This comes up fequently, and I never understand why a proper resolution in the corporate minutes, accompanied by a written agreement between the shareholder and the corp, won't solve the problem.

Just today I received a document from Wells Fargo, advising me that the credit line I formerly had with Wachovia solely in the corporate name is being changed ever so slightly. Along with agreeing to higher fees if I ever make a late payment and potentially higher interest rates after one year, they offered me the privilege of co-signing for the corp. I could forego that co-signing privilege and cough up the entire balance by October, or I could go along & get along. (I'm discovering that Wells Fargo is real considerate about things like that - they like to give their customers choices).

So, keeping in mind that it's OK for me to enter into an agreement with a third party involving my personal credit and the corporation's in order to secure the line of credit, why would it be any different for a credit card?

[outwest]

Thats big hearted of WF, eh?

You are indeed correct, how many of our problems would be cured by proper bylaws, board meetings, minutes, not paying personal expenses, and in general, just acting like a corp.

But instead the call starts off: "I work for XYZ as district manager and I've got this corporation on the side. How much to do these?"

In less that two dozen words, the caller has served notice of an unmitigated disaster in the making. Run like the wind.

[JohnH]

Yes, big hearted indeed of them. I had a couple of really nice deals with Wachovia which I'm seeing go by the wayside as time passes by. Not a big deal for me personally or business-wise, but I'm sure some of their policy changes are hurting many folks.

Of course, if you could have a private sit-down with some key people at WF, they'd probably say something to the effect that "those sweet customer deals are part of the reason Wachovia nose-dived and we're now in charge." And they may just be right...

After an audit I wnet through with a corporate client last year, I've developed a whole new appreciation for keeping minutes up to date and documenting many informal actions. One lesson came through loud & clear - once an informal action has taken place, it's far better to document it after the fact than to fret & do nothing. Once the horse is out of the barn, you can't necessarily put him back in, but you can put a saddle on him & rein him in. Much better than just letting him continue to run wild.

[JG EA]

...

After an audit I wnet through with a corporate client last year, I've developed a whole new appreciation for keeping minutes up to date and documenting many informal actions. One lesson came through loud & clear - once an informal action has taken place, it's far better to document it after the fact than to fret & do nothing. Once the horse is out of the barn, you can't necessarily put him back in, but you can put a saddle on him & rein him in. Much better than just letting him continue to run wild.

Could you give one or two examples,please, of "informal action" you feel should be in minutes?

[JohnH]

I learned that the most important thing is to include a blanket statement that the BOD endorses/validates/sustains all informal actions taken by the officers during the preceding year, provided they were taken for valid & legal purposes in the furtherance of the business interests of the corporation. The lawyer included boilerplate language to that effect in all annual minutes. Believe me, that covered a host of potential problems in my audit.

I'm thinking another resolution covering informal actions might say something to the effect that due to the current business climate & tight credit policies of lenders, continuing business operations make it necessary for shareholder/officers to use their personal credit cards for corporate purposes. The corporation recognizes its liability for those charges and direct payment to the credit card companies is permitted by the agreement in satisfaction of those obligations to the shareholders. Oh yes, and that the corporation accepts its liability for any charges already made prior to the passage of this resolution - something to that effect and of course subject to approval by the company lawyer.