Today TaxMama hears from Ken in the TaxParlor who says, “My wife is part of a Subchapter S corporation for a craft store. If the corporation does not declare a dividend can we still write off all of her business expenses on our tax return? How many years can we deduct expenses before the corporation has to declare a dividend? “
Hi Ken
Your wife should be running the expenses through the S corp.
Putting the expenses on your personal return requires that the corporate minutes and/or any employment contracts she has with the company specify that the business will not reimburse her. (Or the limit on how much the company will reimburse her.)
And even then, she’ll have to deduct the costs as employee business expenses on Form 2106 – because she must be an employee of the corporation. (Some might say it can be deducted on Schedule E, page 2, as another line for the same S Corp. ) Either way, this increases the odds of audit substantially.
And it makes no difference if the company doesn’t pay her dividends.
In an S-Corp, if there are profits, she will report her share of the profits on her personal tax return even if she doesn’t receive a dime.
How long can a business go on without profits (if there are none)? That depends on the business plan. When does the business plan say there will be profits?
Or it depends on whether the owners are taking the business seriously? Are they really working to generate customers/clients and sales? If not…consider dropping the whole thing and cutting your losses.
If they are, but it will take a couple of years to become profitable, document that. Chapters 1 and 2 of Small Business Taxes Made Easy explain exactly what you need to do to accomplish that.
This is so much more than you wanted to know!
And remember, you can find answers to all kinds of questions about S Corporations and all kinds of other tax issues, free. Where? Where else? At TaxMama.com
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