Can S corp deduct unreimbursed expenses?

[B0555555]

BACKGROUND:

I have an S corp, I'm the only shareholder and employee, and I use cash accounting:

In 2019 I paid for some business expenses on my personal credit card (e.g. misc. supplies and equipment) and the company will reimburse me in 2020.  

QUESTION:

When I do the business taxes (1120S), can I deduct these expenses on the 2019 return or do I need to wait and deduct them on the 2020 return?

My guess is that I can't deduct on 2019 return since I'm using cash accounting and the company didn't actually incur the cost until 2020 when the reimbursement happened; however, I'm asking the question because on a previous years return, where I had H&R block do my return, the same situation arose and they deducted it in the year the items were purchased rather than the year the reimbursement was made.  Then they carried the reimbursement forward to the next year's liability on the balance sheet.  Again, since I'm using cash accounting, I'm wondering if this is ok to do. 

Thanks for the help.

Mark

[Anonymous]

Since it's using the cash basis of accounting, like any other expense the S-corp (or for that matter any other cash-basis taxpayer)  incurs it's deductible when paid not incurred.  That's literally what cash basis means.  However, there is an exception, if the credit card was in the name of the business then you can deduct the expense in the year you put it on the CC.  This seems contrary to what I have written above.  when you put the charge on a business CC the IRS considers it paid because the CC company pays the vendor not the Corp.  The Corp's responsibility is to pay the CC company.   this may sound like splitting hairs but that what the IRS says.   the same would be true if you incurred medical expenses  or other deductible schedule A expenses, they're deductible in the year they go on the CC. on 

The reason you can't deduct them is that it is a personal credit card.   same situation as far as the CC Company but the liability to pay the CC is yours not the corp.  I will say that what H&R  did, I've seen in other cases so there are probably others out there that would disagree with me.  

[B0555555]

Thanks, what do you think would happen if I claim them in the current year?  Would it increase the likelihood of getting audited or could I get a big penalty?

Just asking since it adds up to about $1700 in expenses and since I'm a single owner of the S-corp, its a shame that I have to wait a year to deducted it just b/c I put it on my personal card instead of the company card and didn't reimburse myself yet.  

[Anonymous]

most audits are the result of returns being pulled at random.  even if you are audited some agents might not question the transaction. if an agent were to deny the deduction there would be the taxes, penalties, and interest and the possibility of the audit of additional years.    

here is an excerpt from IRC section 7201 

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

the above relates to tax evasion. would the IRS try to assert it? can't say.  

other penalties that could be asserted in lieu of 7201:

failure to pay tax under 6651(a)(2) 1/2% per month max 25% - this is the most common penalty I've seen asserted when the IRS changes a return increasing the tax liability

accuracy-related penalty under 6662 - 20% of the underpayment of tax 

fraud under 6663 75% of underpayment

willful making and subscribing to false return under 7206 

in the case of the H&R return, there would be difficulty in finding willfulness because you used a firm that specializes in tax return prep and therefore ought to know the "rules". TT is a self-prepared return.  if others disagree with me this might make it a common practice.  

[B0555555]

Thanks for the advice.  So it sounds like I should not deduct it until I get reimbursed.   

Is there a limit to how late I can file a reimbursement for personal expenses?  For example, if I had personal expenses in 2018, and I filed a reimbursement in 2020, would that be an issue?  

[Critter-3]

Why don't you have the corp get a business card for you to use and skip the reimbursement altogether... this is the easiest way to fix this issue going forward?

[Carl]

if I had personal expenses in 2018, and I filed a reimbursement in 2020, would that be an issue?

I wouldn't know that for a fact. But requesting reimbursement for expenses from two years ago would definitely raise flags. I have no doubt of that. 

But there is one thing you need to understand here, that I've not seen clarified in this thread yet.

 If the S-Corp does *NOT* have an "accountable reimbursement plan", then whatever you get reimbursed is included in box 1 of your W-2 and *is* taxable income to you.

If the S-Corp *DOES* have an accountable reimbursement plan, then what's reimbursed to you is not taxable income and is not included in box 1 of your W-2.

For information on what constitutes an "accountable plan", see IRS publication 463 and you want to read Chapter 6 - Reimbursements. https://www.irs.gov/pub/irs-pdf/p463.pdf

[B0555555]

I have a corporate card, however, I, unfortunately, had some stuff get billed to my personal card. 

[B0555555 · Accepted solution]

So after all this, I'm still left uncertain what I should do (deduct the stuff on my 2018 and 2019 returns which I'm in the process of filing), or reimburse myself in 2020 and deduct it on the 2020 return.  

Regarding your comment on raising red flags, why would it raise a red flag?  The IRS doesn't see any of my accounting details unless I'm audited.  Are you just saying that if I were audited, the IRS would have an issue with reimbursing myself this late? What would be the issue they'd have and the associated consequence?

[AmeliesUncle]

As Carl pointed out, because of the excess time involved this does NOT qualify as a payment under an Accountable Plan.  That means it will need to be added to your Wages, including your W-2.