S Corp expenses on K1 or Schedule C?

[cjcarter25]

My husband owns 50% of an LLC organized as an S Corp. He is paid a regular salary and receives a W-2 and a K1. He has business expenses he has paid for with personal money and has not been reimbursed for. Do those business expenses get included in Line 12 of the K1 or separately on a Schedule C?

How does eventually getting reimbursed affect things moving forward? He was not reimbursed in the same calendar year. 

[Anonymous_]

Your husband would not deduct the expenses on Schedule C. 

Rather, the LLC with the S corporation election would have to establish an accountability plan. Thereafter, the LLC filing as an S corporation could take deductions for expenses paid by shareholders.

[cjcarter25]

Got it. Can you shed light on how to correctly report/deduct expenses that he intentionally took on for the company and has not been repaid for? I understand this can be considered a loan to the company? The amount is 5 figures, it seems like this should be something that can help reduce the tax burden for the K1. 

[Mike9241]

@cjcarter25 

he can't take a deduction in 2023 for those expenses because he is an employee and the deduction for their business expenses is not allowed for Federal purposes through 2025.  Some states do allow the deduction. However, it appears that the S-corp could establish an accountable plan in 2024 and reimburse prior year expenses after the plan is established. 

Sorry but with an S-Corp only it can deduct these expenses with an accountable plan. Setting these expenses up as a loan on the books probably won't work because if using the cash basis these expenses weren't paid and backdating to have an accountable plan can be a serious breach of the tax laws. Also, the other s/h would absorb as a deduction against the S-Corp's taxable income of 1/2 of your expenses and vice versa regarding the other s/h's unreimbursed expenses.  What if the other s/h objects? 

Note from the AICPA thread what rules must be followed and the types of expenses that can be reimbursed.  Once established, if the rules are not followed and the IRS audits there could be severe tax consequences. 

see this link from the AICPA on accountable plans.  

https://www.journalofaccountancy.com/issues/2020/feb/employee-expenses-accountable-plan.html 

and from the iRS

https://www.irsvideos.gov/Governments/Employers/WhatyouneedtoknowaboutAccountablePlans#:~:text=An%20...