Non business related expenses

[ILLMAS]

TP had a ball spending the corporation money on personal expenses, he is okay not deducting those expenses on the tax return and paying any tax due, the amount is very significant compared to the income. My concern is the way the accountant reported it, if I want the return to reflect the financials, I would have to put the non business related expenses as a reconciling item Sch M-1, but I think that's the easy way out and she should be reported as additional compensation or due from shareholder. After just going through an audit for client, the agent tack on personal use of vehicle to his personal return as a constructive dividend, so this is where my fear is coming from, your input would be greatly appreciated. Thanks MAS

[JohnH]

If it's a "C" corp and he paid personal expenses out of the corp, then it is a constructive dividend. Taxable to both the corp and to the shareholder.

[kcjenkins]

I'd recommend it be handled as a dividend, Marco.

[Guest Taxed]

In my opinion if you prepare the M-1 and other forms to reflect as a dividend and the accountant or owner objects to it, if I were you I would end my engagement. Is his accountant aware of this and approves it?

If he already has an accountant, why is he/she not filing the return?

[michaelmars]

an S corp it can be a distribution. Since we don't usually get the corp info or write ups in time for the 1099 div, we commonly post them as due from shareholder and then pick them up as payroll the next year. although not correct we never had an issue explaining it to an auditor and getting it ok's. If they make a stink then we amend it to dividend, client gets a refund of the fica and gets lower tax bracket too. The problem of declaring a dividend is if there is a loss or retained earnings is negative.

[verbanik]

Document it as an officer loan and charge interest on it.

Then comp it out next year or keep charging interest on it.

Nothing wrong with loans to officers if there is a note and interest is charged, use the midterm IRS interest amounts, about 2-3%.

Passed many an audit with loans on the book for draws.

[jklcpa]

I've handled this issue many times over the years just as Michaelmars and verbanik have said.

[Guest Taxed]

I am assuming this involves a post dated corporate resolution?

Should the tax return preparer get involved in doing corporate resolutions?

[jklcpa]

If this is in one of my few bookkeeping clients and I catch it right away, I gross it up for the withholdings and bonus it out. For my larger clients that have their own bookkeepers, if the bkkpr calls me to ask, it is also usually pretty soon after the transaction occurs, I would suggest they do the same thing.

The last one that I had that was significant dollars, I booked as a loan to shareholder, charged the interest, and had the client call his attorney to draw up a promissory note to document. It was also documented in the minutes of the annual meeting. This was in a closely held C corp with only one owner.