My question concerns personal expenses on a business account.
I work for an S-Corporation with only one shareholder and at the end of the year, all personal expenses made through the business account have been thrown into an equity account, Personal Expenses. I am completing the tax return and I am wondering how this account is reported and reflected on the S-Corp's return. Is it listed on Schedule K, M-1, or M-2? Does it adjust the Accumulated Adjustments Account?
all personal expenses made through the business account have been thrown into an equity account, Personal Expenses
S corps should not have owner equity accounts as the owners are shareholders and money out comes in only 3 forms
1. W2 Wages
2. non-tax distributions erreantly called dividends
3.Shareholder loan from the company
It is bad enough when a managing member of an LLC comingles personal expenses, less so for a Sole Prop but it is a disaster in a Sub-S and can pierce the corporate veil. You really need to seek paid help from a CPA on this matter.
Since this is an S-Corp I hope the "owner" is paying themselves payroll. The rule as I know it is about 60/40. Meaning those personal expenses go to an account called Shareholder Distributions and it is an equity account but handled by the tax professional that does their taxes. It is income to them but not taxed as self employed income provided all rules are followed. After that, it's closed into retained earning for the year.
There are rules for S Corps and if he is not receiving enough payroll that will cause his "distributions" to also be self employment taxable and sometimes as a single member, depending on the nature of the business IRS might consider it such anyways.
They would be much better off to separate personal finances, to ensure 60% of profits at least are taken as payroll and no more than 40% as distributions. For a distribution it is recorded to the account mentioned above.
Do a bit of reading on S Corps. It will be worth your wile.