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cliff2
New Member

Can a employee of a S Corp stop paying a salary because the S Corp cant afford it and still take unreimbursed business expenses on Schedule A

Being audited because I stopped paying myself a salary due to a lack of money in the S Corp and still  took unreimbursed business expenses on Shed A

3 Replies
TaxGuyBill
Level 9

Can a employee of a S Corp stop paying a salary because the S Corp cant afford it and still take unreimbursed business expenses on Schedule A

I can't find the citation right now (I remember it is difficult to find), but NO, you can only take Unreimbursed Employee Expenses up to the amount of your Wages

As a side note, that is probably the worst way to have handled it.  This is just one of many reasons why it costs more to do your own corporate taxes than to hire a tax professional to do the corporate taxes.
Rick19744
Level 12

Can a employee of a S Corp stop paying a salary because the S Corp cant afford it and still take unreimbursed business expenses on Schedule A

While your facts are limited, I have the following thoughts:

  1. You don't indicate the ownership percentage, but it sounds like you own a majority of the stock.
  2. The IRS has ruled (Revenue Ruling 57-502), when a shareholder-employee is a controlling stockholder, the IRS often asserts that the shareholder cannot deduct the expenses in any event because they relate to corporate business rather than to duties as an employee.
  3. Not taking a salary should not be an issue if the company is struggling as long as you did not take distributions.  The IRS frowns on this.  However, I would take the position that the company could not afford a regular salary (assuming that is accurate) and that any distributions were paid out to pay the tax on the pass-through income.  This of course assumes the company was making $$ and may not have been based on your facts.
  4. In the future, either set up a loan for the unreimbursed unpaid expenses (with a note and an interest rate equal to the current applicable federal rate), or call it a capital contribution.
*A reminder that posts in a forum such as this do not constitute tax advice.*
SweetieJean
Level 15

Can a employee of a S Corp stop paying a salary because the S Corp cant afford it and still take unreimbursed business expenses on Schedule A

Also since you do not receive wages, you might be considered a nonemployee shareholder.:
:
Unreimbursed expenses incurred by non-employee S-corporation shareholders are generally not deductible (TC Memo 1989-207 and TC Memo 1997-446). A shareholder is not entitled to a business deduction for the payment of expenses of a corporation that he or she controls. Rev. Rul. 71-36, 1971-1 C.B. 51 which says pretty clearly: “…the sums advanced by him were expenses incurred in carrying on the business of the corporation, the business to which these expenses pertained was not the taxpayer’s business, but that of the corporation. Accordingly, the advances made by the taxpayer are not deductible in the years paid as ordinary and necessary business expenses under section 26 USC 162 of the Code.”
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