Tax Law (Questions About Taxes)/S-corp expense deduction


Can non-shareholder, father of S-corp owner claim a deduction on his income taxes to the extent of his coverage of business expenses? If not, what are the steps the son and father should take to be able to legally claim the deduction.

Some key facts:
1. Father is not a shareholder
2. Son is sole owner/shareholder
3. Company has generated no revenue as of yet - father has fully financed the business
4. Inc in Delaware 3/2013
5. Neither 1140S nor 2553 have been filed yet

Item 5: the 2553 form is the Sub-S election. If that has not been filed it is not an S-Corp. Not that that directly impinges on the question, but it does have a big impact on the tax effect going forward.

From my Perspective, that would be a good thing. Let me explain.

An S-corp is a pass-through entity, Profits or losses would be passed to the owner. Of course that is the basis of your question. If the operating losses (net expenses, if the business is not profitable) are passed to your son, and he doesn't have other income to offset, then he loses the tax deduction of the loss.

If you did not file the 2553, then it would remain a real corporation that pays its own taxes and RETAINS its operating loss to be carried forward. That means if the business is profitable next year, or the year after or the year after that, then the loss can be offset by that profit.

That would be good, since a disappearing tax benefit, benefits no one.

Then on the flip side, assuming that the business does become profitable, after it uses up all of its loss carry forwards, the tax rate that corporations pay is drastically lower than the personal tax rates.

I know this flies in the face of what you have been told.

The S-corp is promoted as a good thing for start-up businesses. But that is over promoted. It is not universally beneficial. If the business loses money, it is a wash. It did no good, and didn't do much bad. All pass through entities fit this parameter. Going into business to fail? Any entity will work.

If the business makes money, just enough to compensate the owner, then the S-Corp MIGHT under a narrow band of income levels give as much as a 3% tax reduction. That's right maximum 3% tax reduction. And only if the business is generating between $80,000 to $110,000 of total net revenue to the owner. If it generates less than $80,000 there is no benefit. If it generates more than that the tax reduction drops as income goes up Once you are at the $150,000 the savings is just over 0.5%.  

But that is 3% off of 40-55% tax rates.

Call me.

To your specific question:

No you have no way to write off the expenses, that is the sole purview of the "Business". IF you had been loaning the money to the business, and the business failed to pay you back, you could at some point write off the loans as bad debt and get a tax deduction.

HOWEVER, when you write off bad debt, you ATTRIBUTE that loan value as INCOME to the other party, INCREASING their tax liability.

So, will the business be profitable?

If not, quit now.

If so, then hope you are not an S-corp; or,
Convert back to a C-Corp as soon as possible.
Memorialize your payments as a loan. If the business is profitable, then it can pay you back the money. IF it is not memorialized as a loan, it was simply a gift.  

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Richard Fritzler


Specializing in Business and Corporate taxation. Comparing the advantages and requirements of different business entities, such as Sub-S Corporations, LLC`s, Partnerships (Both Limited and General), Doing Business as a Sole Proprietor, or Using a C-Corporation. Issues regarding K-1 distributions, 1040, schedule C, 1120, 1120s. Are you considering domiciling a Corporation in a low tax state? I can review the benefits and misinformation that exists.


I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

National Small Business Owners Association.
Contributing author to "The Corporate Standard Newsletter".

Contributing author to "The Corporate Standard Newsletter".

I have been in the business of assisting business owners in reducing their taxes and liability since 1986.

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