By Howard Abrams, PBS Tax & Bookkeeping
Q. I own my trucking business. I use the cash method of accounting and had a really good year in 2011. When I looked over my December 2011 books, I realized that I had a large net profit. I wanted to reduce my net profit in order to reduce income and self-employment taxes due. At that time I had several expenses that I hadn’t paid yet. If I had written checks for these expenses and mailed them by Dec. 31, 2011, could I have deducted the expenses on my 2011 tax return?
A.Yes, you can deduct the expenses on your 2011 Schedule C if the checks clear when it is presented to the bank. If the checks are returned for insufficient funds, then you cannot deduct the expenses until the check is honored in 2012.
Note that a payment by check is deductible when it is delivered to the payee or when it is placed in the mail, but only if the check is paid by the bank to the payee. If at the time the check is presented to the bank, there are no funds in the account to cover the check but the taxpayer has overdraft protection and the bank honors the check, the deduction is still allowable in the year the check was given to the payee. If, when the check is presented to the payee, he is instructed to hold the check or delay the cashing of the check because the taxpayer’s account has insufficient funds, the expense is not deductible in 2011.
Q. I am the sole shareholder/employee of an S Corporation. I have paid several of the corporation’s operating expenses with my personal funds. The corporation did not reimburse me for any of the expenses. I want to deduct the expenses I paid on my personal return. Can I deduct these expenses on Schedule E by reducing the amount of taxable income that was passed through on my Schedule K-1 (Form 1120S)?
A. No. Unlike reimbursed partnership expenses, unreimbursed shareholder expenses are not deducted on Schedule E. Generally, the deduction for these expenses is reported on the shareholder’s personal return on Schedule A, subject to the 2 percent of AGI limitation, as an unreimbursed employee business expense. This treatment applies because the shareholder is also an employee of the corporation. However, because you are also the controlling shareholder in the corporation, the IRS asserts that the expenses are nondeductible because they are corporate business expenses and not employee business expenses.
Q. My wife and I are having a successful year. Our gross income has increased, and our expenses have remained fairly stable and might even have dropped. We are extremely nervous about how much income taxes we will owe and want to avoid paying penalties. Fortunately, we have paid the estimated taxes that were previously set up for us. What do we do now?
A. The good news is you have kept current with your estimated taxes. When those were set up, your tax professional made sure you would be penalty proof if the taxes were paid. So, at the very least, finish paying the estimates you have.
Prepare an income tax projection so you can talk about your tax situation. There is still time to alleviate potential problems and adjust your estimated taxes if necessary. When you look at your bank account and feel pretty good about the balance, you have to remember that a good portion of it may be earmarked for taxes.
So you are wise to recognize not only that there may be a tax problem, but that you can do something about it. LL
This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at pbstax.com.
Please remember everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.