Fun at Corporate expense.

[Don Hughes]

S-Corp, Medical Office, The Dr and her employee husband love to dance. The question is, they have paid for all their pleasures from their Corp checking account. I have not deducted the pleasure expense from the Corp return. The question is, the expenses, although not a Corp. expense flows to their personal return via K-1 and is counted as taxable income. To make things more interesting, the client set up an LLC to receive income and pay expenses for their dance activity. They are going to issue 1099-NEC for the services (dance expense) they paid for out of the Corp. which has bloated the ordinary income on the K-1. Since the expenses were paid with a corporate check, it seems to me that the S-Corp (Medical Office) should 1099-NEC the LLC that was set up to handle their dance activity and the LLC should 1099-NEC the expenses they had for dance instruction, etc. Going forward this will not be a problem as corrected measures are in plane. I hope this makes sense, thanks for your help.  

[Abby Normal]

Treat these as distributions to shareholders, unless you can convince them to repay the business.

[Lee B]

2 minutes ago, Abby Normal said:

Treat these as distributions to shareholders, unless you can convince them to repay the business.

Exactly, for tax purposes the creation and involvement of the LLC is just a smokescreen for their dancing hobby, which is not a business!

 

[Abby Normal]

And I would not issue any 1099 from the corp to the LLC, because you're creating hobby income and paying tax twice on the same income. Just leave it on the K1 as ordinary income and in the basis worksheets as distributions to shareholders.

[Don Hughes]

In doing so, I put the distribution on the K-1, Line 16D. It did not make any other adjustments to the K-1 and the tax due the IRS did not change. What may I be doing wrong?

[Abby Normal]

23 minutes ago, Don Hughes said:

In doing so, I put the distribution on the K-1, Line 16D. It did not make any other adjustments to the K-1 and the tax due the IRS did not change. What may I be doing wrong?

That's all correct and you don't need to do anything else. There is the question of basis in the S corp and whether any of those distributions are taxable, so be sure to do the basis calc on the K1.