S Corp reimbursements

[S T]

S Corp has no $$$. Shareholders have paid for expenses personally and submitted to S Corp for reimbursement. Can these shareholder payouts be recorded as loans to S Corp to increase loan basis and would it increase their at risk basis as well?

Sandy

[JG EA]

Found this

I've certainly seen this done, but don't know if it is OK. I did find this though,

Shareholder may advance money to the S-Corporation as a loan. A common example is a shareholder that pays for company expenses using his personal credit card, and submits an expense report to the company for repayment. Loans to the company may be short-term loans (to be repaid in one year or less) or long-term loans (to be repaid in more than one year). Shareholder's making loans to their S-Corporation may take a tax deduction in the current year for losses in excess of their stock basis, but only to the extent they have loan basis

http://taxes.about.com/od/scorporations/a/scorp_account_2.htm

[Bees Knees]

It kind of depends on the mechanics of how you did it.

The shareholder goes out and purchases office supplies for $500 using his personal checking account. The shareholder wants to be reimbursed by the corporation under an accountable plan, but the corporation has no money.

1. Deposit $500 from the shareholder’s personal account into the corporation account and call it a loan.

Debit cash account $500
Credit loan from shareholder $500

2. Then, the shareholder submits the office supplies receipts to the corporation for reimbursement, and the corporation actually reimburses the shareholder for the $500 under an accountable plan.

Debit office supplies $500
Credit cash account $500

At the end of the day, the corporation still owes the $500 to the shareholder as a loan, but the corporation gets the deduction for the expense because the corporation reimbursed the shareholder for the expense under an accountable plan.

If a check is not actually paid out of the corporation checking account to reimburse the shareholder, I don’t think it would work. The IRS could say the expense is non-deductible because the shareholder was not liable to pay for corporation expenses, and the corporation never reimbursed the shareholder for the expense. Also, the shareholder loan to the corporation cannot be treated as a loan to the corporation unless the shareholder actually gives money to the corporation.

[ChEAr$]

Upon audit however....

It kind of depends on the mechanics of how you did it.

The shareholder goes out and purchases office supplies for $500 using his personal checking account. The shareholder wants to be reimbursed by the corporation under an accountable plan, but the corporation has no money.

1. Deposit $500 from the shareholder’s personal account into the corporation account and call it a loan.

Debit cash account $500
Credit loan from shareholder $500

2. Then, the shareholder submits the office supplies receipts to the corporation for reimbursement, and the corporation actually reimburses the shareholder for the $500 under an accountable plan.

Debit office supplies $500
Credit cash account $500

At the end of the day, the corporation still owes the $500 to the shareholder as a loan, but the corporation gets the deduction for the expense because the corporation reimbursed the shareholder for the expense under an accountable plan.

If a check is not actually paid out of the corporation checking account to reimburse the shareholder, I don’t think it would work. The IRS could say the expense is non-deductible because the shareholder was not liable to pay for corporation expenses, and the corporation never reimbursed the shareholder for the expense. Also, the shareholder loan to the corporation cannot be treated as a loan to the corporation unless the shareholder actually gives money to the corporation.

Don't you think that any IRS auditor worth his salt, when discovering the true facts,
i.e. the loan and immediate payment back to shareholder, would see through this
and invoke the "form over substance" argument and treat it as a sham?

[Bees Knees]

Don't you think that any IRS auditor worth his salt, when discovering the true facts,
i.e. the loan and immediate payment back to shareholder, would see through this
and invoke the "form over substance" argument and treat it as a sham?

I don't know. Tell me why you think it is a sham?

The expense is legit. The taxpayer isn't trying to take a deduction for something that isn't a real expense. The only reason for jumping through all these hoops is because the corporation didn't have enough cash to pay for the expense.

[S T]

Thanks All

Thanks all who responded to the post!

It is a "pithy" question and situation, but as we all know small business people like H/W that enter into a business and decide to create an S corp entity have no definition of what is a personal transaction vs an S Corp transaction. They can not seem to separate themselves and then continue to write checks both out of personal accounts and S Corp accounts and we come back and Say What? Whatever account is available to them at the time. We as tax professionals try to look to what the actual intent and expense are, and to continue to educate the client! I would hope IRS would understand this to some degree as long as the transactions are not totally fraudulant and an "intent" of the transaction could be somewhat substantiated.

Unfortunately, those of us in this accounting/tax business try to do the best we can to sort it out and work with the regulations!

In this particular scenario with the tax client, the S Corp is totally bankrupt and in the middle of some legal action. There is no income and only expenses. The shareholders are in a big mess with personal guarantees on the S Corp lease, a default on an LP installment agreement for sale of business assets (S Corp is General Partner) and it just continues from there and moves forward. (Separate post)

Moving forward, one small baby step at a time! I might finally finalize this return by the end of the week or next week for the 2006 return. Who knows what 2007 is going to bring me on this client!

I don't think any seminar on S Corps and LP's would cover this scenario!

Thanks Everyone!

Sandy