Incorporating your business as an S-Corporation (S-Corp) has its benefits, but it also has its complexities.
You’re the owner of this business, but you’re also considered an employee (called an employee-shareholder if we want to get technical).
When you incur business expenses outside of your business account, figuring out how those get into the business so you can get a tax break can be confusing. We are going to walk you through how that is done.
Expenses S-Corp owners Pay Outside of their Business Account
Typical expenses that you would incur whether you had a business or not may now be partly deductible within a business.
- Cell Phone
- Home Office Expenses
Now that you have a business you can deduct some or all those expenses. Let’s say that your cell phone is your primary source of your business telephone line using a service like grasshopper or evoice. It’s also your only personal telephone. You can slice that phone bill up between personal and business and deduct the business portion.
Or you use your home or a room in your home to run your business from. Part of those expenses are now deductible.
Here are a couple of other expenses that you may pay personally and want to the S-Corp to deduct
- Business Expenses Paid from a Personal Credit Card
- Business Mileage Driven on your Personal Vehicle
How an S-Corp Owner Can Deduct Business Expenses Paid Personally
You have the business reimburse you.
The IRS allows S-Corp’s to reimburse expenses to employees (yourself). Here is the important part—if you use an accountable plan to do so, then you can reimburse an employee, and the business can deduct that expense without having to tax the employee.
This is important—said another way the business gets a tax deduction and the employee (you) do not have to claim it on your personal tax return.
What is an Accountable Plan?
This is essentially a reimbursement document that details out your company’s reimbursement program. What type of receipts are needed, how often you can get reimbursed, etc.
The accountable plan doesn’t get filed with the IRS, you fill it out and then keep it on file with your other business docs.
How to Calculate these Business Expenses Paid Personally
Cell Phone Tax Deduction for S-Corp Owners
You will first calculate the business portion of your cell phone use. If you use 60% of your cell phone for business and 40% for personal, then 60% of the bill is deductible. Take your total bill (just yours if you are on a family plan unless the members work for the company and use their phone for business purposes) then multiply it by 60% business use. Finally, multiply it by the number of months you used it for.
Example: Cell Phone bill is $100 per month. You use 60% for business, and you are getting reimbursed for quarter 1. $100 * 60% * 3 months = $180 business tax deduction for the cell phone.
The home office deduction is exactly how it sounds – it allows employees to deduct expenses for using their home as an office. You’re an employee and if you use your home for qualifying deductions – then you’re able to use this as well.
Not sure whether you qualify for a home office deduction? This can differ for everybody, but IRS Publication 587 covers this topic. If you would like a personalized assessment, please let me know.
The deduction for a home office is determined by the amount of office space you have vs. the total home square footage available.
Assume that you are using 1 bedroom of your 3 bedroom home for your home office. Let’s say that you total square foot of your home is 1250 square feet. Your home office room is a 10X10 bedroom. Then your home office would be 100 square feet / 1250 total square feet or 8%. So the expenses that you incur to run your home—-8% would be reimbursed.
Rent or Mortgage Interest + Property Taxes + Insurance + Utilities + Any home office Repairs or Maint (i.e., If you painted the Home Office Room) = Total Home Office Expenses *8%
Business Mileage Tax Deduction for S-Corp Owners
Just like the home office deduction, If you own the car, the business can’t claim any expenses. However, you can claim business miles.
The business mileage reimbursement is (2017) 53.5 cents per mile.
You do need to keep a log of your business miles. To calculate multiply your business miles by 53.5 cents. For quarter 1 you drove 1000 miles for business purposes. $1,000 * 53.5 = $535 business tax deduction.
Business Expenses Paid on Personal Credit Card
These are going to be the business expenses that you paid using your personal credit card. This is going to take some work, which is why we always recommend keeping your business and personal expenses separate. Let’s say that you are looking at your credit card statement from a few months ago and they just say the place that you paid for the item i.e. Restaurant, Target, Amazon. You use this card for both personal and business. What is that expense—personal or business? It’s hard to tell without knowing exactly what was purchased. That is what makes this so difficult.
My recommendation is to go through each statement and category only the business expenses into the same categories that use to create your business income statement i.e. Office Supplies, Meals and Entertainment, Dues and Subscriptions, software, etc.
This way when you get reimbursed you know which category to place these in.
How to record the expenses in the S-corporation to be able to deduct them
Now that you have the amounts that you are to be reimbursed for each expense, you have the company reimburse you. There are a couple of ways to account for this.
- Bill Me: If you are using an accounting program, you can create a bill inside the company’s payable to you. You then enter each line item and amount. Then have the business write you a check for that total.
- Create a Journal Entry: Debit each expense account and credit distributions. If you have taken distributions, this will lower those. If you haven’t taken any distributions, then you can credit Loan from Shareholder. This is essentially an account that shows the amount of money that you as the shareholder has loaned the company. Then have the company write your check when you have the cash flow later in the year.
Recap on how to have your S-Corporation deduct business Expenses that aren’t run through the business accounts
- Identify the expenses
- Make sure to have an accountable plan
- Record Expenses
- Write a check from the business to yourself
Don’t hesitate to contact me with any further questions or a personalized tax consultation.