A few simple(?) questions about small business accounting

Posted by The Chairman on February 7, 2008, 7:35 pm

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Hi All,

I'm a small business (S Corp) owner with a few questions. Hopefully I can
get some free advice here!

1) I have heard that it's good to run as many expenses as you can through
the company, personal or business: utilities, car payments, mortgage,
meals, etc. This then shows up as an expense for the company.

In the eyes of the law, is this illegal, or cheating? Should the money
first come to me via payroll, then I disburse it for my personal
expenses? It seems that this method avoids paying any tax whatsoever on
this hypothetical "income".

2) I'll consult an accountant about this, but what happens if your S Corp
shows a profit? Is that money taxed as income, and then retaxed if
disbursed as payroll?

I guess that's it for now. Thanks for your help!

Posted by Jerry Gitomer on February 7, 2008, 11:41 pm

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The Chairman wrote:

> Hi All,

> I'm a small business (S Corp) owner with a few questions. Hopefully I can

> get some free advice here!

> 1) I have heard that it's good to run as many expenses as you can through

> the company, personal or business: utilities, car payments, mortgage,

> meals, etc. This then shows up as an expense for the company.

Not a good idea. Run all of your legitimate business expenses through
the corporation. DO NOT run your personal expenses through the
corporation. Except for those items specifically allowed Your personal
expenses are not deductible -- regardless of who lays out the money.

> In the eyes of the law, is this illegal, or cheating? Should the money

> first come to me via payroll, then I disburse it for my personal

> expenses? It seems that this method avoids paying any tax whatsoever on

> this hypothetical "income".

If your personal expenses are not allowable and you deduct them you may
get away with it, but if you are audited by the IRS you will regret it.

Sorry, but it isn't hypothetical income -- it is real income and subject
to taxes. The one break you get is that the profits of your S-Corp are
not subject to federal (and possibly state) income tax.

> 2) I'll consult an accountant about this, but what happens if your S Corp

> shows a profit? Is that money taxed as income, and then retaxed if

> disbursed as payroll?

Please do consult an accountant.

If your S-Corp shows a profit it is not subject to corporate income tax.
Instead it is distributed to the shareholders as income and is subject
to personal income tax.

> I guess that's it for now. Thanks for your help!

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Posted by Rocinante on February 8, 2008, 12:56 am

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On Fri, 08 Feb 2008 00:35:03 GMT, The Chairman wrote:

> Hi All,

> I'm a small business (S Corp) owner with a few questions. Hopefully I can

> get some free advice here!

> 1) I have heard that it's good to run as many expenses as you can through

> the company, personal or business: utilities, car payments, mortgage,

> meals, etc. This then shows up as an expense for the company.

> In the eyes of the law, is this illegal, or cheating? Should the money

> first come to me via payroll, then I disburse it for my personal

> expenses? It seems that this method avoids paying any tax whatsoever on

> this hypothetical "income".

> 2) I'll consult an accountant about this, but what happens if your S Corp

> shows a profit? Is that money taxed as income, and then retaxed if

> disbursed as payroll?

> I guess that's it for now. Thanks for your help!

The good news is that business expenses are deducted dollar for dollar for
AGI, which means that your AGI is not computed until after the expenses are
deducted. Individuals can only deduct certain expenses from AGI at full
amounts, other expenses are subject to AGI floors. In general, personal
expenses are not deductible and should certainly not be categorized as
business expenses.

--
Work fascinates me. I could sit and watch it for hours.

RocinanteREMOVETHIS@gmail.com
2/8/2008 12:37:43 AM

Posted by The Chairman on February 8, 2008, 3:58 am

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> The good news is that business expenses are deducted dollar for dollar

> for AGI, which means that your AGI is not computed until after the

> expenses are deducted. Individuals can only deduct certain expenses

> from AGI at full amounts, other expenses are subject to AGI floors. In

> general, personal expenses are not deductible and should certainly not

> be categorized as business expenses.

Thanks to both of you for the responses. The original post was borne of a
discussion I was having with another business owner.

Posted by Paul Thomas, CPA on February 8, 2008, 7:57 am

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> I'm a small business (S Corp) owner with a few questions. Hopefully I can

> get some free advice here!

> 1) I have heard that it's good to run as many expenses as you can through

> the company, personal or business: utilities, car payments, mortgage,

> meals, etc. This then shows up as an expense for the company.

> In the eyes of the law, is this illegal, or cheating?

It's cheating, and illegal, and could be considered criminal fraud.

> Should the money first come to me via payroll,

> then I disburse it for my personal expenses?

That's probably the prefered method.

> It seems that this method avoids paying any tax

> whatsoever on this hypothetical "income".

But it's not hypothetical. It's real.

> 2) I'll consult an accountant about this, but what happens if your S Corp

> shows a profit? Is that money taxed as income, and then retaxed if

> disbursed as payroll?

"S" corp profits (after owners payroll) or losses flow through to the
shareholders tax returns.

The net of the profit/loss and the owners wages will remain the same (or
there abouts).

Here:
S profits if there were no owner wages = $50,000
which flows to the owners 1040 via a K-1 from the corporate return.

S profits with $30,000 of owner wages = $20,000.
The $30K gets reported as wages like any other W-2 wages.
The S profits of $20K flow to the owners 1040 via the K-1 from the corporate
return.

In both cases the net taxable remains the same.....$50K.
**I'm ignoring the impact of payroll taxes for simplicity**

Take an S loss of $10K after owner wages of $60,000.
The $60,000 gets reported as wages on the owners 1040,
the loss of $10K flows to the owners return via the K-1 from the corporate
return.
Taxable income remains $50K.

--
Paul A. Thomas, CPA
Athens, Georgia