s corp expenses

[oceanlovin'ea]

This is a new client. Has s corp for several years.

I am looking at last year's return and seeing deductions taken. But I don't see checks written for those expenses that I assume they want to take this year too.
For example,

1) W-2 (wife did them) shows in Box 1 amount of payroll plus officer med insurance. That would be fine, except there was no checks written during the year for the health insurance.

2) Last year s corp paid him $1200 rent for space he uses to store his supplies and equipment....shed I think. But again there were no checks written to him from s corp to pay the rent.

3) There is also a deduction on last year's return for SEP contribution, but it was not paid out of s corp account.

Am I wrong in thinking that if you want to use these as a deduction you must pay them from the business account? Or do I just make journal entries to show an expense and take it from the draws he has taken during the year?

Can't do that with the SEP contribution. If he didn't make it, the return has to be amended.

Linda, EA

[BHoffman]

This is a new client. Has s corp for several years.

I am looking at last year's return and seeing deductions taken. But I don't see checks written for those expenses that I assume they want to take this year too.
For example,

1) W-2 (wife did them) shows in Box 1 amount of payroll plus officer med insurance. That would be fine, except there was no checks written during the year for the health insurance.

2) Last year s corp paid him $1200 rent for space he uses to store his supplies and equipment....shed I think. But again there were no checks written to him from s corp to pay the rent.

3) There is also a deduction on last year's return for SEP contribution, but it was not paid out of s corp account.

Am I wrong in thinking that if you want to use these as a deduction you must pay them from the business account? Or do I just make journal entries to show an expense and take it from the draws he has taken during the year?

Can't do that with the SEP contribution. If he didn't make it, the return has to be amended.

Linda, EA

Hi Linda,

Since this is a new client, I'd probably be asking them these questions, and perhaps asking for substantiation. I do this sometimes with the excuse that I want to have copies in the file just in case they ever get a letter from the IRS questioning that deduction.

By paying company expenses with means other than company accounts, any lawyer is going to be able to prove that there is no separation and they are personally exposed to creditors if they are sued. That "piercing the corporate veil" thing.

These SCorp shareholders who act like Sole Proprietors are a pain.

[oceanlovin'ea]

just wanted to move this back up to see if I get some more comments on this issue.

Linda, EA

[dsi]

I always request to get a copy of the Articles of Incorporation, the bylaws, copies of the stock certificates that were issued, and minutes. I never start working on a corp without these documents.

If they don't have them, I will help them get organized. If they don't want my help (billed at my normal rates), then I don't take them on as a client.

[BHoffman]

Hi Linda - I think your real question is whether the expenses can be deducted if paid from personal accounts.

I think they can be deducted if the substantiation is there, and I think the credit would be either to the Drawing account or to Loan from Shareholder.

You might advise the client to transfer cash from their personal account to the business account, and then pay the expense from the business account. Much less mess than paying directly from personal funds.

Others might weigh in with different opinions or even different facts

[BOB W]

Hi Linda - I think your real question is whether the expenses can be deducted if paid from personal accounts.

I think they can be deducted if the substantiation is there, and I think the credit would be either to the Drawing account or to Loan from Shareholder.

You might advise the client to transfer cash from their personal account to the business account, and then pay the expense from the business account. Much less mess than paying directly from personal funds.

Others might weigh in with different opinions or even different facts

I agree with all said by BHoffman. I complain to my clients for not flowing deposits and expenses through Corp.

The question then follows, do the books reflect loan from shareholder and properly recorded to effect basis?

[kthurman]

This is a new client. Has s corp for several years.

I am looking at last year's return and seeing deductions taken. But I don't see checks written for those expenses that I assume they want to take this year too.
For example,

1) W-2 (wife did them) shows in Box 1 amount of payroll plus officer med insurance. That would be fine, except there was no checks written during the year for the health insurance.

2) Last year s corp paid him $1200 rent for space he uses to store his supplies and equipment....shed I think. But again there were no checks written to him from s corp to pay the rent.

3) There is also a deduction on last year's return for SEP contribution, but it was not paid out of s corp account.

Am I wrong in thinking that if you want to use these as a deduction you must pay them from the business account? Or do I just make journal entries to show an expense and take it from the draws he has taken during the year?

Can't do that with the SEP contribution. If he didn't make it, the return has to be amended.

Linda, EA

Dr. Expense Cr. Payable at 12/31
Dr. Payable Cr. Due to Shareholder as paid

While I am well aware that this puts the shareholder at risk of piercing the corporate veil, I have been through many audits where my S Corp clients have done this and as long as the due to account is paid back it has never been an issue.I let the attorneys and shareholder deal with the legal implications and I stick with accounting and taxes.

"No checks written during the year for the health insurance" - did they or didn't they have health insurance?

[IRC Sec. 280A(c)(6)] will prevent the shareholder-employee from deducting any expenses related to the storage shed.

[oceanlovin'ea]

The rent issue is something he has been taking for several years. IRS has not had an issue with it before. I am just not sure how previous accountant handled this.

But in reality he should be writing a check each month for the rent from the s corp acct. Am I correct?

For the health insurance, I can take the premium from his draws.

So it is not that I can't make the adjustments but going forward I want to explain to him what he should be doing in order to do this correctly.

Linda, EA