As a business owner you sometimes run into situations where you have to use personal funds to pay for business expenses. For example you are at the store shopping for personal needs and then you see an equipment you need for your business on sale. You do not have your business credit or debit card with you. So you use your personal credit or debit card to buy the equipment.
Some typical business expenses paid with personal funds include:
- Travel expenses
- Car / transportation expenses
- Business meals and entertainment
- Business supplies
The best way to handle business expenses bought with personal funds is to save the receipt and request reimbursement from your business. There should be a formal process in place to handle these transactions. If you fail to request reimbursement within a reasonable time, then the expense will have to be claimed as an unreimbursed business expense in your personal tax return.
This article focuses on how the single shareholder in a s corporation handles these issues.
Strategies for handling business expenses paid with personal funds
Use an accountable plan
The most tax advantageous way to claim your reimbursement for business expenses paid with personal funds is to use the accountable reimbursement plan. The accountable reimbursement plan is a written plan that reimburses the shareholder employee for business expenses paid with personal funds.
The plan should be documented in the corporate minutes. Once this plan is in place, you can reimburse yourself for expenses paid with personal funds and also expenses in connection with the use of your home such as mortgage interest, real estate taxes, insurance, utilities, general repairs and maintenance, security service, etc. This reimbursement should be done on a regular basis. You must document the receipts each month you are reimbursed.
Using itemized deduction
In lieu of being reimbursed by the corporation, the sole shareholder may decide to take this as a personal deduction. The expenses are reported on Form 2106: Employee Business Expenses. Form 2106 computes the amount that should be deducted on the schedule A of the personal tax return.
The caveat here is this deduction is limited to 2% of adjusted gross income. This means only amounts above 2% of adjusted gross income can be deducted. Moreover, if you do not itemize your deduction you lose this tax advantage.
Treat the amount as a capital contribution
As a shareholder of your s corporation you could choose to treat this amount as a capital contribution to your business. Treating your business expenses paid with personal funds increases your stock basis in the corporation.
Treat the amount as a loan
You can also choose to treat the amount as a loan to your corporation. This in turn increases your loan basis in the corporation. Be sure to have written documentation in place. The corporation must issue a 1099-int to you (the sole shareholder). The interest income on the loan has to be reported on your personal taxes.
This articles serves as an introduction of how to treat business expenses paid with personal funds. It is recommended you consult a tax professional for which option will be most tax advantageous to you.