Corporate Expenses Covered by Officers or Shareholders.

If you play a major role in a closely-held corporation and take on corporate expenses personally, you may wonder if such expenses paid on behalf of the corporation will be deductible.  These costs may wind up nondeductible both by the officer and the corporation unless proper steps are taken.

In general, you can't deduct an expense you incur on behalf of your corporation, even if it is a legitimate "trade or business" expense and even where the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation's legal existence as a separate entity must be respected, the corporation's costs aren't yours and thus can't be deducted even if you in fact pay them. What's more, the corporation won't be able to deduct them either because it didn't pay them itself. Therefore, it shouldn't be a practice of a corporation's officers or major shareholders to cover corporate costs.

On the other hand, if a corporate executive incurs costs which relate to an essential part of his duties as an executive they may be deductible as ordinary and necessary expenses related to his "trade or business" of being an executive. If you wish to set up an arrangement providing for payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out of town business conferences on the corporation's behalf at your personal expense.

Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. This will at least allow the corporation to deduct the amount of the reimbursement.

Please contact us if you would like assistance regarding any of the above or if you wish to discuss any of these matters further.