Some benefits for a major shareholder of a S Corporation cannot be deducted as expenses of the S Corporation. For example, the cost of health insurance for the shareholder - if paid for by the S Corporation - is passed through to the shareholder, where he will take that as a deduction on the personal return. My question is what does the accounting for this look like on the books of the S Corporation, and how does this affect shareholder basis?
Does the S Corporation do a journal entry to remove the health insurance as an expense, and to move it to the shareholder as a distribution?
Does the shareholder reduce his basis in the S Corporation by the amount of the health insurance distribution?