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IF YOU INCORPORATE YOUR BUSINESS, USE THE CORPORATE CHECKBOOK

October 25, 2007

If you have a business, run it like a business. A sad Tax Court case yesterday shows how expensive being casual with your business records can be.

John Meyer is an Orange, California engineer and software developer. He started a corporation called Pacific Payment Systems, a C corporation, to develop and market a bar-code based billing software. He worked full time on the project in 2002, when he spent $47,521 in business expenses out of his own pocket, which he deducted on his schedule C. That turns out to be a false move.

The Tax Court explained that if the business is the corporation's business, the expenses for the business can only be deducted by the corporation:

Consequently, a shareholder is not entitled to a deduction for the payment of corporate expenses. Deputy v. du Pont, 308 U.S. 488, 494 (1940). Rather, the corporate expenditures that were not reimbursed constitute capital contributions and increase the cost basis of the shareholder's stock to the extent that they can be substantiated. See Ward v. Commissioner, 20 T.C. 332, 334 (1953), affd. 224 F.2d 547 (9th Cir. 1955).

Had Mr. Meyer paid the expenses out of the corporation's bank account, the corporation would have been entitled to the deduction to offset its own income. If Mr. Meyer wanted the benefit of the deductions on his 1040, he should have made an S corporation election and paid the expenses out of the corporation account. By paying the expenses personally, the deductions here are just wasted.

The moral? If you incorporate your business, run it like a business. The corporation pays the corporations bills. And if you want to deduct corporate expenses on your own return, file a timely Form 2553 to elect to be an S corporation

Cite: Meyer T.C. Summary Opinion 2007-181

Tags: business expenses.C corporation.S corporation.

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