If you play an executive role in a closely held corporation and you’ve personally spent money on corporate expenses, these costs might end up being nondeductible unless you take the right steps. This is especially likely to be an issue in connection with financially troubled corporations.
Most expenses won’t be deductible
Generally speaking, expenses you incur on behalf of your corporation aren’t deductible, even if they’re legitimate “trade or business” expenses and even if the corporation you incurred expenses for is financially troubled. This is because taxpayers are only allowed to deduct expenses that are their own. Since your corporation exists as a legally separate entity, the corporation’s costs don’t count as your own and aren’t deductible by you even if you paid them.
And in most cases, the corporation won’t be able to deduct them either, since the corporation didn’t pay these expenses itself. As such, it isn’t advisable for a corporation’s major shareholders or officers to cover corporate costs.
When you may be able to deduct expenses
There are, however, certain circumstances under which these expenses may be deductible.
Costs incurred by a corporate executive that are related to an essential part of their executive duties may be deductible if they’re considered ordinary and necessary expenses related to their “trade or business” as an executive.
Executives who wish to ensure the deductibility of expenses they incur on behalf of their company should include a provision in their employment contract that states the types of expenses that are part of their duties and authorizes the executive to incur them. For example, the employment contract may authorize the executive to incur expenses on the corporation’s behalf while attending out-of-town business conferences.
Executives can also arrange to avoid the loss of any deductions by themselves and the corporation by putting an arrangement in place under which the corporation reimburses them for expenses they incur. If the receipts are turned over to the corporation and an expense reimbursement claim form or system is used, it will at least allow the corporation to make a deduction for the amount of the reimbursement.
If you have questions about these issues or need assistance with deducting corporate expenses, contact us.