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Author: pcguys Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 7:34 AM
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QUESTION:
--------

Can the owner (100% stock) of a Sub Chapter S Corporation deduct dog food as a miscellaneous business expense?

Is the following true:

The difference between Business Income - Business Expenses can be declared as wages or re-invested in the company.

Personal expenses, such as personal auto miles, lawyer fees for a divorce, debt payments to visa for old/personal debt, non-business related food expenses, and dog food should be deducted from wages, AFTER federal income tax is paid.

Many thanks for any info,
Mike
pcguys@cyberdude.com

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Author: jimbo56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51067 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 11:15 AM
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No, you can not deduct personal expenses as business expense no matter what type of corporation.

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Author: ripwest Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51069 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 12:13 PM
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Can the owner (100% stock) of a Sub Chapter S Corporation deduct dog food as a miscellaneous business expense?


If your dog is used as a watchdog to guard your equipment yard at night, you might be able to make a case for the deduction of dog food, otherwise, forget it.

Is the following true:

The difference between Business Income - Business Expenses can be declared as wages or re-invested in the company.

Personal expenses, such as personal auto miles, lawyer fees for a divorce, debt payments to visa for old/personal debt, non-business related food expenses, and dog food should be deducted from wages, AFTER federal income tax is paid.


I think there is something slightly out of kilter in the way that you are looking at this. If you take a salary, it will be included in the business expenses. Personal expenses will never be deducted from wages. They will appear as a non-deductible expense of the corporation. For instance, if you have business income of $10,000 and business expense of $8,000 [including wages], and personal expenses of $1,000 in your Sub S corp, you will report $2,000 income from the Sub S corp, in addition to whatever you took as salary.

Rip


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Author: pcguys Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51071 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 1:30 PM
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"Personal expenses will never be deducted from wages. They will appear as a non-deductible expense of the corporation. For instance, if you have business income of $10,000 and business expense of $8,000 [including wages], and personal expenses of $1,000 in your Sub S corp, you will report $2,000 income from the Sub S corp, in addition to whatever you took as salary."

Thanks for the reply.

Why would personal expenses ever show up for the corporation (deductable or not)?

If $8,000 of the expenses included $5,000 of wages, shouldn't the $1,000 in personal dog food expenses be invisible to the corp? Wouldn't it just come out of wages, at the personal level?

Many thanks for your thoughts on this.

-Mike


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Author: ripwest Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51072 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 2:01 PM
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Why would personal expenses ever show up for the corporation (deductable or not)?


They would show up if they were paid on the corporate checking account, which is what I thought your original question stipulated. The corporation must account for all expenditures, deductible or not.


If $8,000 of the expenses included $5,000 of wages, shouldn't the $1,000 in personal dog food expenses be invisible to the corp? Wouldn't it just come out of wages, at the personal level?


Again, it wouldn't be invisible to the corp if paid out of the corporate bank account. If not paid out of that account, why even bring the question up in relation to Sub S?

If the dog food is paid out of personal funds, then the source could be, as you say, wages. It could also be interest income, dividends, a gift or any number of things. I don't think the source is important.

I still feel that we are missing something here. Originally, you said..

Personal expenses, such as personal auto miles, lawyer fees for a divorce, debt payments to visa for old/personal debt, non-business related food expenses, and dog food should be deducted from wages, AFTER federal income tax is paid.


Deducted for what purpose? Why 'AFTER federal income tax is paid'? Are you referring to the accounting for personal expenses in your personal personal statement of receipts and disbursements?

One more time. If the sub s pays a salary, it is deductible by the corp, and income to you. If you receive the salary in your personal bank account and make non-deductible expenditures, so be it. It has nothing to do with your sub S corp. If, on the other hand, the corporation made the non-deductible expenses, these have to be accounted for in the records of the corporation.

Rip



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Author: pcguys Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51075 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 5:08 PM
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Thanks for the reply Rip.

The context for my question is as follows:

A "friend" boasted about how smart he is, being 100% owner of a sub chapter S corp. He bragged about how even his dog food expense (obviously personal) is charged on his corporate American express card. How on paper, he is losing money, but living the high life, driving an expensive company leased automobile for business & personal use, declaring no income. He added that his corporation and he are one in the same.

It seems to me that if the business is paying all of his personal expenses, which as you mentioned, are non-deductible to the business, wouldn't it show as something like a loan the sole employee if it was correctly recorded as non-deductible? If it was paid out of the company checking account, and since every dollar must be accounted for, he must have to pay it back (like a loan, I guess). If, however, he is recording obviously non-deductible expenses as deductible, I guess that's a problem too.

In any event, based on what you've said, the Federal Government is the big looozer, because he is paying no personal tax on his wages (because he isn't declaring any). Since he is deducting personal expenses, which are clearly not deductible (thus reducing business income incorrectly), the business is not paying tax on the difference between income and expenses.

I guess when I used the term "deducted" when I framed my original question, it was misleading. I should have said: "should he pay for his own dam dog food with his wages, and not with his corporate American Express card?"

Do I now seem to have an accurate sense of how personal expenses should be paid, in the context of a sub chapter S corp. and federal income tax?

A quick note to confirm this would be very much appreciated.

Many thanks for helping me a handle on this.

-Mike



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Author: ripwest Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51076 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 5:36 PM
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A "friend" boasted about how smart he is, being 100% owner of a sub
chapter S corp. He bragged about how even his dog food expense
(obviously personal) is charged on his corporate American express card.


Ah, now I see where you're coming from. The answer is simple. He is
charging everything on the corporate credit card, and deducting it as
though they were legitimate corporate expenses. This, of course, is misguided at best, and probably amounts to tax fraud, since he is bragging about it.

So, in answer to the rest of your question, it would not appear as a
loan, since it is being treated as a legitimate corporate expense.

If this doesn't clear it up, come on back.

Rip


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Author: pcguys Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51078 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/18/2001 6:12 PM
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Rip, U Rock!

Your explanation was crystal clear. When my "friend" told me I don't know anything about business, he tried to make me feel like dummy. With your help, I now realize he is a fool (not the good kind:-)

Regards and thanks again for helping me understand.

-Mike



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Author: jimbo56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51092 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/20/2001 7:41 AM
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Maybe you can feed his dog when he goes away to the big house.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51094 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/20/2001 10:17 AM
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Allow me to pipe in at the 11th hour on this issue.

Certainly any expense, given the proper circumstances, can be a legitimate business expense; even dog food. However, the other posters are very correct; when the corp/business is paying any expense there are only a couple of possible outcomes:

1. The expense is a legitimate business expense & therefore has the proper effect of reducing the business' net income.

2. The expense is a not a legitimate business expense & is recognized as such. As a result, when paid by the business it not recorded as an expense but as a "credit" & is made to any of several different possible accounts: distributions to owners, loan to owners, etc. all of which are not expense accounts and do not reduce the net income of the business.

3. The expense is not a legitimate business expense but is not recognized as such. As a result, when paid, it is treated (albeit incorrectly) the same as #1 above. When this occurs and the records of the business are subsequently examined; there are again three possible outcomes:

a. The examiner misses the transaction in whcih case the business owner has "skated".

b. The examiner catches the transaction; reclassifies it or them and assesses additional taxes plus interest.

c. The examiner catches the transaction; reclassifies them & due to their outrageousness, assesses interest, plus penalties, plus taxes for fradulent transactions.

The last issue probably worth mentioning which however is a genuine benefit to being a business owner & is the subject of expense attribution or proration. Let's say you are a typical W-2 employee for XYZ corp. & have a computer at work. In addition you have own personal computer at home for typical recreational activities. XYZ corp. takes a full business deduction for your work place computer even though you occassionally "surf the net" at work; e.g. a non-work event. Conversely, because your home computer is 100% pleasure, there is no tax deduction involved.

Now, you quit XYZ corp. & form your own company called ABC corp. Your old personal computer dies so you throw it in the trash. Your new corp, ABC buys a new computer becuase there are good & valid business reasons for ABC to have a computer. However, in addition to performing real business activities on this new computer; you occassionally surf the net; not unlike when you where at XYZ corp. Is ABC corp., your corporation, obligated to prorate your business usage from your personal usage & only take a business deduction for the business activities? Absolutely not. ABC corp. takes a 100% business deduciton just like XYZ did.

In this manner, some level of savings has been achieved; however, it tends to be minor and is not some attempt at blatantly converting personal expenses into business expenses.

TheBadger


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Author: ripwest Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51095 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/20/2001 10:55 AM
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I agree with the Badger that it is the 11th hour [probably way past] and we are probably beating a dead horse. Having said that, and being somewhat anal retentive, I can't let stand certain items in the Badgers response.

2. The expense is a not a legitimate business expense & is recognized as such. As a result, when paid by the business it not recorded as an expense but as a "credit" & is made to any of several different possible accounts: distributions to owners, loan to owners, etc. all of which are not expense accounts and do not reduce the net income of the business.


First of all such an expenditure would not be recorded as a 'credit'. If treated as a loan, it would apprear as a 'debit'. Secondly, the item could very well appear as a corporate expense, reducing the corporate income, but not being deducted for taxes. Unallowable expenses are reconciled on Schedule M1. Excess travel and entertainment [meals], officers' life insurance, expenditures against public policy come to mind.

Other than that, I am happy to let the matter drop. Maybe it's not a dead horse we are beating, but a dead dog<g>.

Rip


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Author: pcguys Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51097 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/20/2001 11:32 AM
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Dead horse or not, I really appreciated all the replies to my question.

I knew coming to fool.com was a great idea!

Thanks again to everyone!

-Mike


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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51100 of 121061
Subject: Re: Sub Chapter S Corp & DOG food deductions? Date: 5/20/2001 12:01 PM
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First of all such an expenditure would not be recorded as a 'credit'. If treated as a loan, it would apprear as a 'debit'. Secondly, the item could very well appear as a corporate expense, reducing the corporate income, but not being deducted for taxes. Unallowable expenses are reconciled on Schedule M1. Excess travel and entertainment [meals], officers' life insurance, expenditures against public policy come to mind.</>

ripwest:

You are 1000% correct. The correct entry would be:

CR Cash/Checking $xxx.xx
DR YYYYYY $xxx.xx

where YYYYYY is some liability account or equity account. I automatically reverse my "language" when I perceive that I am likely addressing non-accountants who tend to think of a "credit" as increasing the size of an account; otherwise they get confused.

TheBadger






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