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Is my accountant right?
Dear Small Biz Adviser:
My husband and I opened a bar in 2000 and incorporated it. In May
2001, we closed it due to a possible move closer to his work and
employee theft. We left owing a business credit card balance and
the startup note that we had borrowed from the bank. We ended up
paying the note out of our personal account. Will we be entitled
to some of it back on our tax return? Should we file the corporation
separate or with our personal taxes? Last year, our accountant filed
it with our personal taxes, leaving us with no deductions -- not
even the note from the bank or my home office.
Kelly
Dear Kelly:
You say your accountant combined the income from employment with
that of your business in one return. There are only certain legal
business descriptions under which this can be done:
1. The business is
operated as a proprietorship.
2. It is a limited
liability company that is formed in the legal manner and uses
a bookkeeping process consistent with a proprietorship. As such,
this type of LLC is treated as a proprietorship for tax purposes.
3. The business is
a partnership in which you are represented in that partnership
as an individual (proprietor) or an LLC as described in situation
two above.
A corporation is recognized as a legal entity apart
from the individuals who are the shareholders in the company. Therefore,
you cannot consolidate income tax returns for a corporation with
those of an individual. The dividends distributed to you from your
shares of stock in the company are filed with your personal income
tax returns. That is where it ends.
The payments on the corporation accounts made by you
and your husband are recognized as payments made by the corporation
on its accounts. You are represented individually as a shareholder
who has invested more capital into the corporation. In turn, that
is represented as a monetary investment on your part.
The account and note payable are corporation expenses.
The cash you used to pay those notes is first recorded on the corporate
books as cash on hand, and then used to pay down those related expenses.
The expenses are deducted from sales to determine the income earned
by the corporation. It appears in your corporation's case that there
was no net income before taxes. The corporation apparently has incurred
a loss for the year in question.
The critical tie between you (and your husband) and
the corporation is in the filing of corporate tax returns. If the
company has incurred a loss and is shut down, then your accountant
will note that investment loss in your personal returns as regards
the investment made. That is deductible for income tax purposes.
I suspect your accountant did not combine individual
and corporate results in one return. I suspect he or she simply
noted the investment losses in your personal returns to reduce exposure
to personal income tax. In other words, you are likely earning deductions
against taxable, personal income.
Regarding any deduction for your home office, review
IRS
Publication 587, Business Use of Your Home. It clearly defines
legitimate deductions. I presume your accountant is fully aware
of such deductible expenses and related formulas.
In the end, I would hope you are sufficiently confident
that your accountant is protecting your best interests. If not,
which may be the reason you wrote me, you may want to seek the opinion
of another accountant.
I wish you well.
-- Posted: Feb. 14, 2002
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