In Uncategorized on 01/09/2023 at 19:03

Sub S corporations are pass-throughs; tax incidents flow through to the shareholders. But when shareholders pay the expenses of the business, which ostensibly belongs to the S Corp, who gets the deduction? And it matters, because if the deductions belong to the shareholder and not the S Corp, they’re unreimbursed employee business expenses. These were subject to the 2% AGI limit pre-1/1/18, and so it was with Kyle D. Simpson and Christen Simpson, T. C. 2023-4, filed 1/9/23.

Judge Courtney D (“CD”) Jones does a lot of slicing and dicing of expenses over three (count ’em, three) different tax years. Kyle and Chris claim accountable expenses reimbursement plan with their Sub S. Even though such arrangements need not be in writing, Kyle and Chris come up short on proof.

Judge CD Jones: “While a shareholder may identify his interest and business with those of the corporation, they are legally distinct and, ordinarily, if he voluntarily pays or guarantees the corporation’s obligations, his expense may not be deducted on his personal return. Such payments, absent any fixed obligation for repayment, are generally regarded as a contribution to the capital of a corporation and are deductible, if at all, by the corporation. However, a corporate resolution or policy requiring a corporate officer to assume certain expenses indicates that those expenses are his rather than the corporation’s.” T. C. Memo. 2023-4, at p. 10. (Citations omitted).

The question is whether the expenses confer future benefits or are made to acquire or create a capital asset. If for ordinary operations, they are expenses of the corporate employees. Kyle and Chris do get one year’s home office deduction, but only as unreimbursed employee business expense.

This result would definitely be a stinger post-1/1/18, as unreimbursed employee business expense deductions are off the table until 1/1/26.


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