Operating your business as an S Corporation comes with its unique set of rules, especially when it comes to handling business expenses. As an employee of your own corporation, it's crucial to understand the right way to manage travel reimbursements to ensure you and your corporation maximize tax benefits. Let's break down the essentials of seeking reimbursement for business expenses incurred on behalf of your S Corporation.

Understanding Your Role and Responsibilities

First, recognize that as an S Corporation owner, you are also an employee of the corporation. This distinction is important because it affects how business expenses, especially travel expenses, should be handled for tax purposes. The corporation is a separate legal entity, and as such, it's the business that should directly incur and pay for business expenses.

The Pitfalls of Not Seeking Reimbursement

Choosing not to seek reimbursement from your S Corporation for business expenses you've incurred can lead to several negative tax consequences:

1. Loss of Deductions: If you don't seek reimbursement, these expenses cannot be deducted as employee business expenses on your personal tax return.

2. Itemized Deductions Limitations: Attempting to claim these expenses as itemized deductions subjects them to the 2% of adjusted gross income threshold, potentially reducing or eliminating their deductibility.

3. AMT Complications: For those subject to the Alternative Minimum Tax (AMT), employee business expenses offer no tax relief, as they're disallowed under AMT rules.

The Preferred Approach: Expense Reimbursement

The most efficient way to handle business expenses is through submitting an expense report to your corporation for reimbursement. This approach allows the corporation to deduct the expenses, while you receive the reimbursements tax-free. It's a win-win situation that ensures compliance with tax laws and maximizes tax benefits for both you and your corporation.

A Cautionary Tale: The Case of Tibor Horwath

Tibor Horwath's experience serves as a cautionary tale for S Corporation owners. Horwath failed to seek reimbursement for travel expenses from his S Corporation, choosing instead to deduct them on his Schedule C for his sole proprietorship. This decision led to the denial of deductions for both his proprietorship and the S Corporation, showcasing the critical importance of proper expense reimbursement practices.

Key Takeaways for S Corporation Owners

- Maintain Separate Finances: Always treat your corporation as a separate entity and conduct all business expenses through the corporation.

- Seek Reimbursement: For any business expenses you incur on behalf of the corporation, submit an expense report for reimbursement.

- Avoid Personal Deductions: Do not attempt to claim corporate business expenses as personal deductions or employee business expenses.

- Document Everything: Keep meticulous records and documentation for all business expenses and reimbursements.

Conclusion

For S Corporation owners, understanding and implementing the correct process for handling travel and other business expenses is crucial. By seeking timely reimbursements through your corporation, you ensure that both you and your corporation remain in good standing with the IRS, avoid unnecessary taxes, and maximize your available deductions. Always consult with a tax professional to navigate the specifics of your situation and to stay updated on the latest tax laws and regulations.