S-Corp Expenses

[Rich V]

I would like some clarification regarding S-corp expenses. 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. The way I look t it it should be a shareholder distribution for the amount the S-Corp paid for the phone bill and the employee would then take a deduction on his 1040 as unreimbursed business expense since there was no accountable plan set up. For 2006 an accountable plan is in place so the S-Corp is now cutting the employee a monthly reimbursement check for any employee business expenses. Am I approaching this correctly? Thanks

[Bees Knees]

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.

[Rich V]

Thanks

Thanks for the response. I wanted to make sure it made sense.

[OldJack]

I would like some clarification regarding S-corp expenses. 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.

Well as usual I have to take the position to disagree with Bees. Who the cell phone is "registered" to is not that important as it is clear that the S-corp is paying for the business use and if you dug it up you would no doubt find the the S-corp paid for the purchase of the phone and as such owns the d-a-r-n thing. As to an accountable plan... such plan does not have to be in writing and as the president of the S-corp he can authorizes an accountable plan for reimbursement of every single phone call the moment the client starts to makes the call.

Of course cell phones are a sore point with the IRS regardless of who owns the thing they are going to try to disallow it so why not argue over them disallowing it at the S-corp level.

[Bees Knees]

Oh there is ALL kinds of things we could argue about....

Let's try this one....

TTB, page 8-12, "Employees must adequately account to the employer for their travel, meals, and entertainment expenses. They must give the employer documentary evidence of their travel, mileage, and other emplyee business expenses. This evidence should include items such as receipts, along with either a statement of expenses, and account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred."

I wonder if this S corp guy is going to give himself a log of which phone calls were personal, and which were for business? Handing the corp a cell phone bill and saying, here, pay this, is not accounting for each phone call. That would be like turning in all gas receipts for driving your car without splitting out personal trips from business trips.

Somehow, I don't think IRS would just let the guy make it up as he goes.

[OldJack]

Bees... Its nice when you can quote yourself (TTB). However, we were talking about an "accountable plan" not that an individual would not have to submit the "who, what, where, when, and why" proof. Of course documentation is necessary for justification on audit, but we all know that documentation does not keep most from deducting anyway. Business expense is business expense for the corporation even if not all documentation is in order for proper tax deduction.

I agree that personal expenses should not be charged to the business and there is a procedure for that referred to sometimes as taxable benefits where the benefit is added to the employee W2 or the employee reimburses the employer.

Sometimes the penalty on audit is acceptable to not having to follow the rules. Kinda like the 55 mile per hour speed limit we use to have on the interstate highways and the laws in my state that say public schools aren't allowed to start until after labor day. Since the school law has no penalty the schools simply ignore it and start in early August.

Its not up to "tax preparers" to arbitrarily decide the client can't do this or that. Its not up to tax preparers to arbitrarily decide to disallow questionable expenses by charging them to the draw or distribution account. Our roll is to advise the client of the consequences and then prepare or not prepare the tax returns.

[Bees Knees]

Yes, and our advice to the client is to set it up properly on an accountable plan, like the original poster said he was doing. You want to advise him that he can retroactively set up an accountable plan. I doubt that would fly in court. An accountable plan is when you follow the accountable plan rules. If the corporation just gives the guy a reimbursement without following the rules, it is considered a taxable reimbursement.

[Bees Knees]

Bees... Its nice when you can quote yourself (TTB). However, we were talking about an "accountable plan" not that an individual would not have to submit the "who, what, where, when, and why" proof.

It's also nice when I can quote the pubs, regs, code, court cases, and a number of other things I like to look at from time to time.

I WAS talking about an accountable plan.

IRS Pub 463, page 28, "Adequate Accounting
One of the rules for an accountable plan is that
you must adequately account to your employer
for your expenses. You adequately account by
giving your employer a statement of expense,
an account book, a diary, or a similar record in
which you entered each expense at or near the
time you had it, along with documentary evi-
dence (such as receipts) of your travel, mileage,
and other employee business expenses.

Sound familiar??? Like almost word for word from TTB? Geeee, I wonder why?

[OldJack]

I have no quarrel with the pub and what you quote. Of course you have to account. The post says and I quote "the S-Corp did not have an accountable plan". My statements was that there does not have to be a written plan. The plan can be as simple as a statement to the employee "geterdone...bring me the documents of proof and the company will reimburse you". That is a plan. Your response was not about a plan but only about what the requirements were to account for a deduction. duh!

[Bees Knees]

I never said it had to be a written plan. The reg does say it has to be an "arrangement." An arrangement implies having a consistent policy on how reimbursements are to be made, including the rules I quoted in the Pubs and TTB.

I really don’t understand why that needed to turn into an argument.

[OldJack]

Bees

I never said it had to be a written plan. The reg does say it has to be an "arrangement." An arrangement implies having a consistent policy on how reimbursements are to be made, including the rules I quoted in the Pubs and TTB.

I really don’t understand why that needed to turn into an argument.

I didn't know we were having our first argument. I thought we were discussing the tax case pro and con. I disagree that an "arrangement" implies having a consistent policy. Where did you get that implication? An arrangement can simply mean a specific one-time understanding between two people.

As to you not saying a plan has to be in writing, you said quote: " Yes, and our advice to the client is to set it up properly on an accountable plan, like the original poster said he was doing. You want to advise him that he can retroactively set up an accountable plan. I doubt that would fly in court." That sure sounds like you are talking about a written plan.

I disagreed with your opinions in this case and wanted the poster to know there was another opinion because of the following:

(1) This case proposing to disallow and charge to distribution was primarily based upon the corp not having a "plan" and it would appear that you agreed with that plus an assumption that there was no justified documentation although the original post stated there would be a business deduction as an employee on the 1040. That would indicate there was proper required documentation that would meet the accountable plan that you want to disallow.

(2) You also decided that the S-corp did not own the cell phone simply because it was registered in the name of the officer even though it would appear that the Nextel payment must have included the cost of the purchase. Also, it would appear that the intent of the S-corp and officer was for the corp to own and operate a business phone (corp making payments) and it is not our place to say otherwise.

Do you disagree with this and just want to argue?

[Bees Knees]

I disagreed with your opinions in this case and wanted the poster to know there was another opinion because of the following:

(1) This case proposing to disallow and charge to distribution was primarily based upon the corp not having a "plan" and it would appear that you agreed with that plus an assumption that there was no justified documentation although the original post stated there would be a business deduction as an employee on the 1040. That would indicate there was proper required documentation that would meet the accountable plan that you want to disallow.

I disagree with advice that says go back and change history. I don’t like telling clients to lie about what really happen. Sure, it don’t need to be in writing. But that doesn’t give you the license to make up what you should have known to mean at the time you really didn’t have a clue as to what you should have meant.

Did he have an “arrangement” with himself that would have met the accountable plan rules? Or are you saying go back in history and pretend he had an arrangement with himself to follow the rules?

Ever hear of ethics?

(2) You also decided that the S-corp did not own the cell phone simply because it was registered in the name of the officer even though it would appear that the Nextel payment must have included the cost of the purchase. Also, it would appear that the intent of the S-corp and officer was for the corp to own and operate a business phone (corp making payments) and it is not our place to say otherwise.

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.

Of course, that assumes the S corp actually paid that first bill, and that the guy didn’t pull out his personal credit card in the store to pay for the original purchase….like most of us do….

[OldJack]

I disagree with advice that says go back and change history. I don’t like telling clients to lie about what really happen. Sure, it don’t need to be in writing. But that doesn’t give you the license to make up what you should have known to mean at the time you really didn’t have a clue as to what you should have meant.

Did he have an “arrangement” with himself that would have met the accountable plan rules? Or are you saying go back in history and pretend he had an arrangement with himself to follow the rules?

Ever hear of ethics

Only you have made a claim that I was suggesting back dating a "plan", suggesting the client lie, or the client doing anything else unethical. You obviously are unwilling to admit that you were wrong with your opinion in this case and therefore trying to blame me with something I did not say or imply.

For some unknown reason you seem to think that a officer/employee incurring a business expense ,as an agent of the corporation, would not be considered a business expense and instead you think it had to be a personal expense under an accountable plan. Only you would think that the officer approving the expenditure and the same officer incurring the expenditure would not know the "who, what, where, when and way" of their own actions. Paper documentation of the expenses have probably not been ask for and there is no clear indicated that the officer doesn't have or can't provide the required proof.

In this case the cell phone appears to be a corporate business expense/expenditure with possibility that there might be a taxable fringe benefit for personal use. However, there is also a possibility that the personal use is a de minimis tax-free benefit. Another reason for you to not jump to conclusions.

Yes, I have heard of ethics. In my entire public practice I have practiced with stricter ethics established long before todays decree and probable before you entered the workforce. I can even say I have NEVER even advertised or solicited a client that was using another CPA, a ethics rule that has long since repealed but should not have. I find your ethics remark offensive and clearly out of line. You should be ashamed to accuse me of violating ethics.

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.

Of course, that assumes the S corp actually paid that first bill, and that the guy didn’t pull out his personal credit card in the store to pay for the original purchase….like most of us do….

In the original post "in 2005 the S-Corp paid $3,500 to Nextel", that most likely included the purchase don't you think?

[Bees Knees]

Yes, I have heard of ethics. In my entire public practice I have practiced with stricter ethics established long before todays decree and probable before you entered the workforce. I can even say I have NEVER even advertised or solicited a client that was using another CPA, a ethics rule that has long since repealed but should not have. I find your ethics remark offensive and clearly out of line. You should be ashamed to accuse me of violating ethics.

I’m not ashamed of anything. I didn’t accuse you of violating any ethics. It is nice to know that you DO have such a high regard for ethics, otherwise you would not have taken such offense when you miss-interpreted my remarks.

I too must have miss-interpreted your remarks when you said:

Sometimes the penalty on audit is acceptable to not having to follow the rules. Kinda like the 55 mile per hour speed limit we use to have on the interstate highways and the laws in my state that say public schools aren't allowed to start until after labor day. Since the school law has no penalty the schools simply ignore it and start in early August.

I guess I should have asked you first what you meant when you said “sometimes the penalty on audit is acceptable to not having to follow the rules.”

What did you mean by that remark?

[OldJack]

I’m not ashamed of anything. I didn’t accuse you of violating any ethics. It is nice to know that you DO have such a high regard for ethics, otherwise you would not have taken such offense when you miss-interpreted my remarks.

I too must have miss-interpreted your remarks when you said:



I guess I should have asked you first what you meant when you said “sometimes the penalty on audit is acceptable to not having to follow the rules.”

What did you mean by that remark?

"Sometimes the penalty on audit is acceptable to not having to follow the rules" is an attitude or decision of the corporation that is more concerned about efficiently operating the business rather than if a deduction is taken on the corporate tax return. In addition I would point out that a tax preparer is not required to audit or serve as the long-arm of the IRS to enforce compliance with the rules or laws of the same. If a tax preparer can't ensure himself that the tax return is believed to be in compliance with the rules, it is the tax preparers responsibility to withdraw from the tax preparation and not sign the tax return. The tax preparers does not have IRS authority to disallow deductions the taxpayer claims nor the authority to enforce that the shareholder has taxable income from disallowed corporate deductions. These are decisions of the IRS and the taxpayer.

Your implication that this is a violation of ethics is misguided. Contrary to your belief, all expenses of a corporation do not have to be allowable as deductions for taxes. Such legal expenses do not necessarily have to be charged as distributions to employees or shareholders which is why I disagreed with your advice to the poster. Corporations are legally allowed to incur non-deductible expenses such as corporate owned key man life insurance policies, entertainment facilities, club membership and dues, sports tickets, etc., without these expenses being necessarily chargeable to the officer/shareholders as personal draws or personal taxable income. You are wrong to advise other preparers that they are required to do otherwise as you did in this post.