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Old 06-05-2012, 07:34 PM
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Personal funds to cover corporate expenses

Corporate officer used personal funds to cover some corporate expenses for the last two years. How would this affect the corporation income tax return? It seems like these contributions should be counted somehow (the shareholder currently has a note receivable on the books) and the expenses paid were not included in the corporate financials. Could the last two years of contributions be accounted for in this tax year?

Thank you in advance for your time and comments!



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Old 06-06-2012, 02:02 PM
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“Corporate officer used personal funds to cover some corporate expenses for the last two years. How would this affect the corporation income tax return? “----->If you put your personal funds in the business in the form of property or cash, you clearly need to designate how the money is to be considered as a loan or as an owner investment. You can choose either a loan or an investment, but make sure the paperwork is complete and that it is easy to see how the transaction is considered on the books of the business. For example, you can set up loan from owner liabilities account to track all yur personal funds that you transfer straight(perhaps) from your personal bank account to company account. This is where you would record deposits that you make to your business from your personal funds. For example, in the case of S corp, shareholder's making loans to their S-Corp may take a tax deduction in the current year for losses in excess of their stock basis, but only to the extent they have loan basis. However, adjusted basis, loan basis of S corp, I mean, cannot be below zero. You can also set up vendor name with your name to track all your personal funds that you pay cash or using debit card to cover business expenses for reimbursing yourself for purchases you make for the business using your personal cash or debit card. When you write the check to yourself, use the various expense accounts to record all the purchases you made. You can also set up personal credit card account to track all business expenses that you pay using your personal credit card for recording the purchases you make with your personal credit card. You need to record the credit card charges to the various expense accounts as you would for any other credit card. When you write the check to yourself to reimburse for these charges, use this credit card account.Needless to say, the most common mistake business owners make is not keeping personal and business funds separate. This mistake is also a prime target for IRS scrutiny in audits. An occasional mistake is only human. Just make sure you document the mistake and edit the transaction in your business records. For example, if you deposit a personal check in your business account, label it as owners equity; if you need to take the money back out, you need to enter the check as a draw on your owners equity. If you forget and pay for something with your personal credit card, label this as an investment also. So, you need to make sure that you have correctly labeled the mistakes in your business records. In general, every transaction between yourself and the business must be clearly labeled, at arms length, and reasonable. You will find that once you get into the habit you will find it easy to do.
“It seems like these contributions should be counted somehow (the shareholder currently has a note receivable on the books) and the expenses paid were not included in the corporate financials. Could the last two years of contributions be accounted for in this tax year?”----->It depends on your accounting method. Most individuals and many small businesses use the cash basis method of accounting. Generally, this means you record expenses when cash is paid out. When it comes to tax deductions, they're taken in the taxable year when they're paid for, in the last two taxable years, NOT in this year; however, in the case of prepaid expenses expenditures (if you had paid)that create an asset having a useful life much longer than the taxable year ,usually 12 months or more, are treated differently. These expenses may not be deductible in the last two years, or may be deductible only in part, for the taxable year in which they were paid. For example, rent payments for the use of property for years after the taxable year you actually make the payments are only partially deductible. For example, in 2010, Company A enters into a 10 year lease with rent of $10,000 a year. The company pays the entire $100,000 rent for the 10 year period in 2010. Only $10,000 is deductible in 2010, NOT the whole of $100K. The remaining $90,000 is deducted $10,000 each year for the next nine years of the lease. Tis situation is exactly same even under the accrual method. Under an accrual method of accounting, generally you deduct expenses in the year they're incurred when you know you have a bill to pay. I mean when all events have occurred fixing your liability to pay the expense and the amount of the expense can be figured out with reasonable accuracy. For example, say you buy office supplies, receive them and get billed for them all in Dec. 2010. You pay the bill in Jan.2011. You can deduct the expense in 2010 because your liability was fixed, you knew how much you owed and economic performance (as the property or services are provided) happened in 2010.



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Old 06-07-2012, 01:59 PM
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Would amending the corporate tax return to include expense accounts left off previously (since they were paid with personal funds) trigger an audit? The total expense amount is under $10,000.



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Old 06-07-2012, 02:35 PM
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“Would amending the corporate tax return to include expense accounts left off previously (since they were paid with personal funds) trigger an audit?”----> Filing an amended tax return does not, in and of itself, red flag you for an audit. However, the IRS notes that amended returns go through a screening process just like regular returns, which could result in an audit. Also, filing an amended return adds an extra layer of IRS scrutiny of your taxes. There is no conclusive evidence that filing an amendment will trigger your return for audit.Howevr, it is believed that the IRS will examine an amended return more thoroughly than the original tax return. It is also believed that the IRS may review the situation even more carefully if you file an amended return and are due a large refund. Typically, when the IRS examines your amended return form, it is looking to see if you have the proper documentation and reasoning to back up your changes. Although the IRS does have the ability to look up some of your tax documents, it is easier and more efficient for them if you provide the information with your amended return form. Therefore, to make the processing of your Amendment more smooth, it is recommended that you provide sufficient documentation along with your amended return form. Clearly, the issue is what triggered the amended tax return, and if it is an inadvertent omission of expenses ,the amount should clearly be reported on an amended tax.
“ The total expense amount is under $10,000.”---->I guess it depends on the size of your corporation; trivial matters are to be disregarded in accounting, and all important matters are to be disclosed. Items that are large enough to matter are material items. Generally, you do not need to file an amended return due to math errors. The IRS will automatically make that correction;so, not all errors require an amended return; for example, minor errors in your math, like tax liability and refund calculations, can be corrected by the IRS service center. Major errors, as with your deductions and credits warrant an amended tax return.



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