How to record personal expenses paid from S-Corp's business checking account?

Thank you Rustler for that fast response.  I really appreciate it.

I just noticed, though, that I wrote S-Corp, although it's a C-Corp.  Typo mistake.  Does it make a difference in your answer?

If I may, to ask you another question?

This C-Corp is actually for a new client of mine, and I'm just starting out and very unsure how to deal with this properly.  

How far does our (bookkeeper/accountant) liability go in terms of client's tax returns and reporting?  I've advised this client not to include all these personal expenses as "business deductions" for the C-Corp, even though they're relatively low (compared to total expenses).  However, they don't want to get into the detail of it and want to "risk it" just so that they can get it over with for this calendar year...  And then starting from next year, they want to do things properly and not mix personal and business.  If the company were to be audited, could I be in any trouble?  I've advised them, but they don't listen.

Also, this owner (or more properly the sole shareholder) used her personal credit card to pay for business expenses and was advised by another bookkeeper to just set up this as a "bank account". So, for example, if she were to purchase some office supplies for her business, she'd debit expense account and credit this "bank" account.  It should be that she's crediting a liability account because it's a credit card.  I don't understand what can be a valid reason to treat a credit card as a bank/asset type of account.  The problem is that the balance in this account basically represents an "asset" although in reality it's really "expenses"...

c- or s- corp the concept is the same

In a corp, distributions are not a way of just taking funds from the company the way equity draws are in a partnership or sole proprietor. Distributions should be after salary and are usually an end of year thing, and as I understand it there should be corp records where the board approves a per share amount and the date.

Corporation accounting is or can be very complicated, especially where shares and distributions are concerned.  You really need to get with a corp type tax accountant, misusing distributions can lead to significant IRS penalties.

Using a bank account is a work around some use to make data entry easy, since you use write checks on that account.  A negative balance in a bank account is a debt, a liability to the company, just as a liability account would be.

So an entry in  a bank account for say fuel expense, would show the expense paid on the P&L, and a debt (negative bank balance) on the balance sheet.  Then at some point you pay back the shareholder, paying the debit in other words, and you use the dummy bank account as the account you are paying, just as you would for a liability account for a loan.

regardless of the type of business formation, sole-P or corp, or .., personal expenses should never show on the company P&L, ideally they should not be in the books at all.

I do not know what the legal ramifications would be for an outside bookkeeper if the IRS were to levy fines and penalties, you might ask a tax accountant to weigh in on that.

As a bookkeeper you should be working hand in hand with a corp tax accountant, I strongly suggest you establish that relationship on behalf of your client if they do not have one.

C Corporation and S Corporation are very different with regard to personal/business expenses. In both cases, there should not be personal expenses recorded as business expense on books.

 

S Corporations have a Distributions account, which are distributions of profit to shareholders, after owners (who are also employees) have been paid reasonable amounts for salary including payment of payroll taxes.  This is where you would need to charge any personal expenses paid with company funds which should ideally be an exception for this to occur since there are limits to Distributions allowed, for example, if you have no revenue you have no profit to distribute, right?  

 

C Corporations do not have Distributions. They have Dividends which may be paid to shareholders when the BOD declares a dividend payable, but these are paid after taxes and where you hear the term "double taxation." 

 

Yes, credit card accounts are opposite of bank accounts, since they are liabilities vs. assets.

 

 

I don't mean to be alarmist, but since you told us this is your Client...

This part: "I've advised this client not to include all these personal expenses as "business deductions" for the C-Corp, even though they're relatively low (compared to total expenses). "

 

Is why Enron People went to Jail. How liable are you? Very Liable. How bad would this be in an audit? Severe and punitive.

 

Nothing here is their personal piggy bank. Once they put money into the corporation, it belongs to the Corporation. They don't get to spend it on Personal.

 

You need to get this in front of a CPA ASAP and perhaps this situation can be salvaged before the 1120 due date.

Small piece of the whole big bad picture here, but fuel is also not a reimbursable expense unless it is for a rental car.  Fuel is not reimbursable on company vehicle where the calculation for business expense is based on IRS formula and personal portion of mileage must be added to W-2 as taxable income.  Use of personal vehicle requires tracking miles and can be reimbursed at IRS mileage rate. ALL of my clients are S Corp or C Corp.

Retirement account funds add a whole new issue to this.  Are these funds that were withdrawn so they paid penalties and interest on them?  If not, then this person may have personal tax issues too.

This isn't the case, either: "It should be that she's crediting a liability account because it's a credit card.  I don't understand what can be a valid reason to treat a credit card as a bank/asset type of account."

 

It's Not a Credit Card Account for the Business; you told us this is Personal Spending. You don't track a Personal Card in the corporate bookkeeping. What happens is, this Employee submits the receipts to be reimbursed for business expenses, under the terms of An Accountable Plan, per the IRS.

 

Fuel is Personal when the vehicle is not a Corporate-owned vehicle. Then, again, the Employee submits a Mileage report and gets paid for Business Mileage, under the terms of An Accountable Plan and per the IRS mileage rates.

 

Unfortunately, the TCJA of Dec 2017 changed many of these laws for 2018 taxes. You cannot take Unreimbursed Employee business expenses as part of the 1040 taxes.

 

It really seems that both you and this person need to get with a CPA to review all activities, what they are called under the Rules, how to treat them in the accounting, and what Is and is Not business and what is Not Run through the business.

 

Look, it's nearly Mid-Jan. Do Not Stall.

Definitely a mixed bag of issues with IRS for sure.  Probably a few red flags.  Not good client to me.