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A few simple(?) questions about small business accounting

Hi All,

I'm a small business (S Corp) owner with a few questions. Hopefully I can get some free advice here!

1) I have heard that it's good to run as many expenses as you can through the company, personal or business: utilities, car payments, mortgage, meals, etc. This then shows up as an expense for the company.

In the eyes of the law, is this illegal, or cheating? Should the money first come to me via payroll, then I disburse it for my personal expenses? It seems that this method avoids paying any tax whatsoever on this hypothetical "income".

2) I'll consult an accountant about this, but what happens if your S Corp shows a profit? Is that money taxed as income, and then retaxed if disbursed as payroll?

I guess that's it for now. Thanks for your help!

Reply to
The Chairman
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The good news is that business expenses are deducted dollar for dollar for AGI, which means that your AGI is not computed until after the expenses are deducted. Individuals can only deduct certain expenses from AGI at full amounts, other expenses are subject to AGI floors. In general, personal expenses are not deductible and should certainly not be categorized as business expenses.

Reply to
Rocinante

Rocinante wrote in news:1gxl9giejshel$.15kw7jtalf4us$. snipped-for-privacy@40tude.net:

Thanks to both of you for the responses. The original post was borne of a discussion I was having with another business owner.

Reply to
The Chairman

"The Chairman" wrote

It's cheating, and illegal, and could be considered criminal fraud.

That's probably the prefered method.

But it's not hypothetical. It's real.

"S" corp profits (after owners payroll) or losses flow through to the shareholders tax returns.

The net of the profit/loss and the owners wages will remain the same (or there abouts).

Here: S profits if there were no owner wages = $50,000 which flows to the owners 1040 via a K-1 from the corporate return.

S profits with $30,000 of owner wages = $20,000. The $30K gets reported as wages like any other W-2 wages. The S profits of $20K flow to the owners 1040 via the K-1 from the corporate return.

In both cases the net taxable remains the same.....$50K.

**I'm ignoring the impact of payroll taxes for simplicity**

Take an S loss of $10K after owner wages of $60,000. The $60,000 gets reported as wages on the owners 1040, the loss of $10K flows to the owners return via the K-1 from the corporate return. Taxable income remains $50K.

Reply to
Paul Thomas, CPA

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