If you play a major role in a closely held corporation, you may sometimes spend money on corporate expenses personally. If you don’t take the proper steps these costs may not be deductible by either the officer or the corporation. Most often this happens when the corporation is in financial trouble.
What can’t you deduct?
Generally, 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. This is because a taxpayer can only deduct his own expenses. And since your corporation is a separate entity, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.
To make matters worse, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised corporate officers shouldn’t make covering corporate expenses a regular practice.
What expenses may be deductible?
On the other hand, if a corporate executive incurs costs related 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 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 be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
What’s the best alternative?
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.
Contact us if you’d like assistance or would like to discuss these issues further.
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