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IT'S YOUR COMPANY. IS IT YOUR DEDUCTION?

July 10, 2008

When you're an entrepreneur, the line between your business and your personal life can get blurry.  When that happens with your checkbook, it means trouble.

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 was a false move.

The Tax Court told him that only the corporation can deduct corporate expenses.  If the shareholder pays them and isn't reimbursed, the expenses are treated as a contribution to capital.  That increases the shareholder's basis, but that doesn't help the shareholder's tax picture until the company is sold.  That's true both for C corporations and S corporations.

Mr. Meyer could have submitted his receipts to the company for reimbursement; the company would have been able to deduct the expenses.  Or he could have had the corporation pay the expenses directly.  But by paying the expenses out of his own checkbook and not turning them in for reimbursement, he lost his deductions altogether.

The moral of our story: if you incorporate your business, run it like a business. The corporation pays the corporation's bills, or your deduction vanishes.

This post originally appeared at IowaBiz.com

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