Can I get a tax deduction for my S Corporations expenses that I paid personally? Unreimbursed partnership expenses

Can I get a tax deduction for my S Corporations expenses that I paid personally? Unreimbursed partnership expenses

By Jeffrey Brooks, CPA, CFP, MBA, President of JBrooks Wealth Advisors, PC. a CPA and CFP Professional Firm. 602-292-2009.

S corporation Shareholders should beware of failure to get reimbursed by your corporation! (and as you will see later…partnership)
I will use a fictitious name for a dentist. Jake is one of the shareholders of a dental practice. Jake uses his personal credit card and sometimes personal checks to pay for automobile expenses, travel and meals and entertainment.

For the year of 2010, Jake spent $6,500 on behalf of his dental practice. Jake wants to reduce his portion of the dental practice taxable income by the $6,500. Can he do that? What if his dental practice was a partnership?

First we need to know if the dental practice files its taxes on accrual or cash basis of accounting. Most dentists know the difference between accrual or cash basis but if you do not know the difference, please go to the end of this article for an explanation.
Dental practices with revenues under $10 million dollars can continue to file on the cash or tax basis of accounting instead of the accrual basis. 100% of my dental practice clients are under $10 million in revenues.

Jake should have been advised by his CPA to get reimbursed by 12-31-10 for all S corporation expenses that he paid personally. Unfortunately, Jake will not get a deduction for these paid personally for the corporation and will also fail to deduct these expenses personally as an Employee Business Expense on Schedule A of his personal tax returns.

If Jake’s dental practice had been a partnership, Jake could have reduced his portion of dental partnership by these “out of pocket expenses” paid personally but ONLY if the partnership had a written policy of not reimbursing for partnership expenses such as travel, meals and entertainment, office supplies. If there wasn’t a policy stating that the practice would not reimburse the partner for certain types of expenses like travel, automobile, meals and entertainment, etc, then Jake would fail to get reduced income at the partnership level as well as personally.

Most physician and dental practices utilize the cash-basis method of accounting for reporting income and expenses (also referred to as the income tax basis). This method is preferable to the accrual basis because cash-basis practices don’t have to report and pay income taxes on revenue until it is collected. They also generally expense materials and supplies when paid for.
Accrual-basis practices must report and pay income taxes on revenue that has been billed regardless of when collected and are generally required to defer expensing of merchandise and materials and supplies until sold or consumed. Generally, medical and dental practices operating as sole proprietorships, partnerships with no C corporation partners, S corporations, and qualified personal service corporations (as defined under Sec. 448(d)(2) of the IRC) are permitted to use the cash basis. Taxpayers generally elect which basis to use with the filing of their original return. Once a taxpayer elects the accrual basis, it cannot change to the cash basis without IRS consent. The IRS seldom grants permission to make such a change.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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Phone: 602-292-2009