Deductibility of Corporate Expenses Covered by Officers or Shareholders
- Find out if you can deduct expenses that you personally pay for your corporation.
- Learn the difference between deductible and nondeductible expenses.
- Discover the types of expenses that are deductible and how you should handle being reimbursed.
Do you play a major role in a closely held corporation and sometimes spend money on corporate expenses personally? These costs may wind up as nondeductible expenses both by an officer and the corporation unless you take proper steps. This issue is more likely to arise in connection with a financially troubled corporation. Fiducial has more on this important topic below!
Deductible vs. nondeductible corporate expenses
In general, you can’t deduct an expense you incur on behalf of your corporation. Even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled – you can’t. This is because a taxpayer can only deduct expenses that are his own. And since you must respect your corporation’s legal existence as a separate entity, the corporation’s costs aren’t yours. Thus, you cannot deduct them even if you pay them.
What’s more, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, beware that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.
When expenses may be deductible
On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing for payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may have authorization to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.
Would you like to discuss these issues further? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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