Personal expenses of S Corp

[Greenbriar]

Many small S corps with single owner frequently pay some personal expenses out of the business account. They leave it up to the accountant to report it. I am curious as to how most accountants handle this under two scenarios: 1) positive beginning AAA and 2) negative beginning AAA. Assume it was never a C corp. On the 1120S, is it loan to shareholder, a dividend (assuming sufficient net income for the year), salary or distribution? Thanks.

[oceanlovin'ea]

Personal expenses

When the corporation pays for something that is a personal expense, I usually consider it a owner's draw. It can't be deducted and so just show as part of their distributions for the year.

Linda F

[Bees Knees]

The problem with an owners draw is if you have more than one S corporation shareholder, you create a 2nd class of stock if distributions are not even by the end of the year.

You also cannot call it a loan from the S corporation to the shareholder because IRS would later say the S corporation is not in the business of lending money and reclassify it as a distribution, then terminate the S status for creating a 2nd class of stock, and then assess late payment and interest penalties for failure to pay C corporation taxes on the profits.

You need to give a dooms day warning to your clients if they ever pay for anything out of the S corporation checking account that is not business related.

Speaking of dooms day message, I just got back from a Bob Jennings Seminar. IRS just completed their S corporation test audit program. Out of 5,000 S corporation audits, all but a handful had increase tax adjustments. Number one on the list was S corporation wages too low.

Due to the overwhelming results and increase revenue netted from these audits, IRS says they are about to conduct 80,000 S corporation audits. For those who have been playing the beat the FICA tax game, you are about to have your clients audited.

Be warned. It’s coming.