[mpa24]

What are the correct accounting entries for business expenses for 2010 and 2011 that were paid for by a shareholder and not reimbursed. The expenses were not included in the P/L for 2010 or 2011. Can these be classified as loans to the company in 2011 or reimbursed employee expenses in 2011? Thank you!

[Fr_Chuck]

What agreement was made prior to the payment for how this was going to be treated, And how much is it? What is the corporation policy on how to address these issues.

Was it paid, excepting to be paid back that month, if so, it is a outstanding debt that is open but not paid. Was there a loan agreement did to be a loan ?

[mpa24]

Thank you Fr Chuck for looking at my question - much appreciated. The corporation is small (just one shareholder), so no formal agreements. Total expenses paid for is estimated to be under $10,000. There is no loan agreement either - I believe personal loans to the corporation should have been made to enable use of company checks, but he decided to just pay the bills as they came with his personal money.

Can the expenses paid still be added onto the 2011 expenses with a personal loan to the corporation? I believe an open debt exists, which would ultimately decrease the company's equity that in the end gets paid out to the shareholder? The corporation is filing its final tax return this year (2011).

[ArcSine]

The journal entries to correct the omission would simply involve debits to the various expense accounts (corresponding to the expense types paid by the shareholder on behalf of the corp), and a credit to the balance sheet in some liability account such as "Loan / Advance From Shareholder".

Strictly speaking, any of these expenses that were incurred in 2010 should be put onto 2010's books (the expenses on the 2010 P&L, and the liability to shareholder showing on the Dec 31 2010 balance sheet).

Also strictly speaking, the 2010 corporate tax return should be amended to reflect these expenses (and there might be some tax refund benefit to doing so). This is because technically, those 2010 expenses can't be claimed as a 2011 tax return deduction; they can only be claimed for the year in which they're incurred (pursuant to a strict interpretation of the tax law). Hence, if you don't deduct them on an amended 2010 return, you simply lose them altogether.

That's not to say that many folks wouldn't simply put them all on the '11 return and skip the extra bother of amending '10. It's also not to say that an IRS agent in a good mood wouldn't let that li'l shortcut slide, especially if the amounts were relatively immaterial. But that would have to be your call.

On a separate note, if you don't plan on having the corp repay that loan sometime pretty soon, you should consider drafting a promissory note to support the arrangement as being a valid debt. Make sure the note bears market-reasonable terms as to repayment schedule and interest rate. Otherwise, you run the risk of having IRS successfully assert that the original payments by the shareholder for various corporate expenses were actually intended to be contributions to the entity's capital by the shareholder, rather than a short-term loan.

This may or may not be any big deal, but it's possible that a subsequent repayment to the shareholder would have different tax consequences, depending on whether the advances are respected as a bona fide loan, or are deemed to be capital contributions.