Personally Paying for Corporate Expenses Often Nondeductible
Owners and Shareholders of closely held businesses and other corporations can sometimes find themselves covering expenses on behalf of their corporation. If these payments are not handled properly, they could become non-deductible to both the corporation and the individual. The Corporation is considered a separate legal entity and its finances must stay separate from that of its owner or shareholders. As a rule, the Corporation should only be deducting expenses that it incurs and pays itself. To make sure the business tax deduction is allowed, as a standard practice, the Owners or Shareholders should not be paying for corporate expenses out of their own pockets.
Ensuring Deductibility of Corporate Expense Paid by the Owners
There are times however when it’s unavoidable and the owner will cover certain expenses of the business. In those instances, there are some recommendations to ensure that your expenses are deductible by the corporation. The first method is to set up a provision in the contract of the corporate executive that specifically identifies the types of expenses that are part of the corporate duties. With agreements/policies in place, it allows the executive to incur company expenses and be reimbursed for them. The alternative method is to set up a procedure whereby an executive can turn in receipts (proper substantiation and an accountable plan) and will be reimbursed for those incurred costs. When done correctly, the business expenses will be fully deductible by the corporation.
Please contact your Wegner CPAs tax advisor if you’d like assistance in reviewing your corporate reimbursement policies or would like to discuss these issues further.
