Personal Expenses - SH loan, distribution, or non-deductible exp?

[Harvest]

Where do you recommend putting personal expenses on 1120S. If I put as distributions taxpayer will have distributions in excess of basis and pay tax on it. If I put into shareholder loan account amount will be 80k ish. If I put nondeductible expenses it will not reduce basis and be eliminated. I am thinking of using the latter option and was wondering if any one had an opinion? I was always under the assumption that the proper place for them was as distributions and nondeductible expenses was reserved for 1/2 meals and fines and other business related costs that were not deductible.

[qbteachmt]

Are they going to repay this?

Are there other shareholders to consider?

It's not nondeductible expense, because it has nothing to do with business. It has to do with a person thinking this corporation is their personal piggy bank and not a separate entity. This contributes to "piercing the corporate veil" and law firms love to see this, since it opens up the issue of risk for them to file suit against the person and the corporation, if need be. The reason to use a corporate structure includes asset and liability protection, and this taxpayer just blew up that protection. The IRS loves to see this, too, since they can come in and declare that $80k more as payroll and payroll tax avoidance can result in late taxes, interest and penalties being owed.

[TaxGuyBill · Accepted solution]

Money taken out of the corporation for persona use is either (1) loans, (2) wages/compensation, or (3) distributions.

If there is not documentation that it is a loan, it is not a loan.

Was "reasonable compensation" paid?  If not, it is wages and payroll returns may need to be filed or amended.  If "reasonable compensation" was paid, then it would probably be distributions.

[Terry53029]

You should not try and use personal expenses in Scorp to try and dodge taxes. That is a section 230 code violation. You can use unreimbursed business expense on the shareholders 1040. As far as basis, nondeductible expense general does reduce basis (not below zero) See link: good info.

https://www.thetaxadviser.com/issues/2010/apr/scorporationbasisreductionsfornondeductibleexpenses.ht... 

Sec. 1367 provides rules for adjustments to S corporation shareholders’ basis in their stock. Generally, basis is increased for items of income (including tax-exempt income) and the excess of deductions for non–oil and gas depletion over basis of the property subject to depletion. It also allows for decreases in basis (but not below zero) by each of the following:

• Distributions;
• Items of loss and deduction that flow through to and are deductible by the shareholder;
• Nonseparately computed loss;
• Nondeductible expenses that are not properly chargeable to capital accounts; and
• Depletion deductions for oil and gas property that do not exceed the adjusted basis of such property allocated to the shareholder.

[Harvest]

This is my thinking exactly. Since the company had a loss my understanding is that there is no need to run payroll, even though they did pay the owner a small salary (higher than most employees). There was no loan document, so this definitely falls into distributions.

I just had a bright idea of putting it into nondeductible expenses, but I guess from the comments that's not an option.

I guess the business related entertainment (hunting trip with clients) he took could be put into nondeductible expenses because it had a direct business purpose it just isn't allowed anymore under TCJA?

[Harvest]

No other shareholders thank goodness.

[TaxGuyBill]

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@Harvest wrote:

Since the company had a loss my understanding is that there is no need to run payroll, even though they did pay the owner a small salary (higher than most employees). There was no loan document, so this definitely falls into distributions.

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Um no.  If the company had a loss AND the owner did not take any money out, there may not be a need for payroll.  But if the owner took money out, that FIRST is applied to reasonable compensation/payroll.  So that brings us back to my prior comment, was "reasonable compensation" paid?   If not, it should be payroll.

[Harvest]

Thanks for your insight Bill. Yes, in this case I believe it was reasonable. But then again what is reasonable hahaha that can be quite a rabbit hole there.

[qbteachmt]

"even though they did pay the owner a small salary (higher than most employees). There was no loan document, so this definitely falls into distributions."

You might give this person some guidance, that the IRS can look at taking $80k with some small salary, and recharacterize all of that as Wages. You need to find out what this person is thinking when they use these tactics, because they are going out of their way to create exposure legally and for IRS purposes. It's even worse, when they pay personal expenses directly from the corporation; I use the term "discoverable" as in, if you are dumb enough to pay your children's private school tuition from the corporate bank account directly, you deserve it when the IRS notices.

[Accountant-Man]

Sorry for shouting, 

DO NOT PAY PERSONAL EXPENSES FROM A BUSINESS ACCOUNT.

End of rant.