As a general rule, a legal entity is considered a separate entity from its owner. There are some cases where a corporate entity is disregarded as a separate entity from its owners, such as when a corporation is formed and treated as a proxy for its shareholders as a workaround. does not apply to corporations, Roccaforte v. Comm’r, 77 TC 263 (1981), rev’d, 708 F.2d. 986 (5th Cir. 1983) (announced by a Court of Appeals decision that the relationship between a corporate representative and its principal should not be dependent on ownership by the principal).
In most circumstances, shareholders cannot deduct expenses owed by a company created by the shareholders themselves. Decisions in this area were made before there was an S Corporation, and the consequences of this are likely to be disregarded by owners after an ordinary tax corporation (C Corporation) forms a wholly separately treated entity. It is easier to understand if it is an entity with From its owner for federal income tax purposes. In a recent U.S. Tax Court lawsuit, if an S Corporation owner attempted to pay the S Corporation obligations (real estate taxes and operating expenses) separately from personal funds and deduct those expenses from personal income, the S Corporation found to be subject to this same general rule. tax refund. Although the cost was a business expense, it was the business of the corporation rather than the owner.look Vorreyer, et al. al., v. Comm’r, TC Memo 2022-97 (21 September 2022).
The general rule has some exceptions that apply to other situations.
- The owner is involved in the same business as the corporation to the extent that the payment of expenses is normal and necessary for the owner’s business and the corporation is financially unable to pay the expenses (Lohrke v. Comm’r48 TC 679 (1967)).
- Costs paid by the owner are recognized as costs on return of the legal entity, even if paid by the owner (Ferguson v. Comm’r, TC Memo 2019-40) Alternatively, payments made by the legal entity to the owner’s expenses charged to the owner on the books of the legal entity may be deducted by the owner (Goodman v. Comm’r, 5 TCM 1126 (1946) (Docket No. 103137, Issue D)) However, these decisions are frequently challenged by the IRS.
- By law, corporations cannot pay taxes on the profits of the owners of the corporation (such as property taxes on shares of the corporation), deduct payments at the corporation level, and seek reimbursement from the owners (IRC § 164 ). (e) and Treas. Reg. § 1.164-7). But such taxes are becoming increasingly rare.
- Based on the theory that the trust beneficiaries are the beneficiaries of the real estate, the trust beneficiaries are entitled to pay and deduct real estate taxes imposed on the trust as title owners of the real estate (Mobius22 TCM 391 (1954). Liggett4 TMC 598 (1945)).
Going back to the S Corporation scenario, it’s often much safer to follow a two-step procedure that leads to the same result. That is, have the owners loan or donate funds to the corporation, then have and allocate the expenses owed to the corporation. A fee paid to the owner as part of the proration requirement of IRC § 1366(a). The recent tax court precedent quoted at the beginning states: Vorreyer v. Comm’rrejecting the argument that the S Corporation transaction or business should be attributed to the owner and that the costs paid by the owner can be deducted from the individual return, citing previous tax court cases, Russell vs. KommleTC Memo 1989-207 (1989), respecting the existence of S Corporations as well as C Corporations.
When payment of Company S’s expenses becomes due, the two-step procedure described in the previous paragraph can be used to have the owner pay the expenses and pass such expenses rather than passing them through Company S. Consider trying to deduct directly.
The two-step procedure is not available for C Corporation owners. Rourke If the exceptions described in the first bullet point above are available, a better procedure would be to have the company have sufficient funds to pay the costs, adding to the company’s net operating loss and making such This is especially true through 2025, as unpaid expenses for individual employees cannot be deducted as itemized deductions.