If you have paid for business expenses with personal funds during the tax year, and you were not reimbursed by your S-Corp or partnership, you can still submit them for reimbursement in the following year. Although you could take a deduction on your personal return for these expenses in the year you incurred them, the tax savings would be less than if you allow the entity to deduct the expense on the entity return and thereby reduce your income. No matter which year you take a reimbursement, you should keep supporting documentation for the expenses you are reimbursed for, such as cancelled checks or credit card statements, along with an invoice or receipt for what was purchased.
You can deduct on your individual tax return certain expenses you pay personally conducting partnership business, such as automobile and home office expenses. The partnership agreement must indicate the partners are required to cover these expenses. You should check your agreement and change if necessary. This could allow you to depreciate your vehicle or take a mileage deduction, and to deduct certain expenses you incur maintaining a home office.
IF you are a partner in a Partnership or LLC, consider paying your child justifiable compensation for performing services for your Partnership in its business activities, such as filing, answering the phone, and computer assistance, sufficient to utilize your child's standard deduction and/or their lower tax bracket. It is still necessary to pay your child through the normal payroll process and a W-2 should be issued at year-end.
If you are a shareholder using your home as your sole business location, you may be able to take a Home Office deduction through your business. Even though you maintain your sole business office in your home, you CANNOT rent your office to your business. However, you can enter into an agreement with your corporation to reimburse you for your office expenses including utilities, repairs, and depreciation. This is somewhat aggressive. However, we believe such a reimbursement of specific expenses to be allowable. We suggest you submit a request for reimbursement to your corporation at least quarterly and have the corporation pay the request as it would any third party bill.
The IRS has attacked S corporations it believes are being used to avoid FICA taxes (i.e., where shareholder/employees are being paid S corporation distributions, which are not subject to FICA, instead of wages). In these instances, it has reclassified distributions as wages, resulting in back taxes and penalties.
These instances were generally where no salary was paid to the shareholder/employee. Generally, shareholder/employees should be paid a reasonable salary before any distributions are made. Distributions should preferably be made on a quarterly or similar basis. DO NOT pay with same frequency as your regular payroll.
S corporation losses are limited to amounts invested and loaned DIRECTLY by the shareholder(s) to the S corporation. If debts are currently between the S corporation and an unrelated third party, such as a bank, restructuring the debt through the shareholder(s) to the S corporation will increase the shareholder's at-risk basis for loss deduction. However, when the debt is repaid to the shareholder, the shareholder may have to recognize income since the debt's "at-risk basis" is reduced by the S corporation losses used against the debt. Please contact us to discuss this matter further. (Note: Being a COSIGNER or GUARANTEEING a corporate debt will NOT provide you with "at-risk basis" to deduct losses. ONLY direct loans from the shareholder(s) to the corporation will create at-risk basis.)
If you are an owner in an S corporation, consider paying your child justifiable compensation for work helping your S corporation in its business activities, such as filing and answering the phone, computer assistance, sufficient to utilize your child's standard deduction and/or their lower tax bracket. Note: Payroll taxes will be due on this compensation. Please contact us to assist you in implementing this tax-saving idea.