Reimbursable Expenses Under An Accountable Plan

Technical topics regarding tax preparation.
#1
AlexCPA  
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As I review prior posts regarding accountable plans used by S-corporation shareholders (in particular, this thread: viewtopic.php?f=8&t=13953), it seems that the question of which specific expenses are allowable for purposes of the reimbursement is still unsettled (please correct me if I'm wrong in this regard). So I thought I would start at the beginning with the following:

"Chapter I. INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY Subchapter A. INCOME TAX Part 1. INCOME TAXES Subjgrp 2. Tax on Corporations Section 1.62-2. Reimbursements and other expense allowance arrangements.

(b)Scope. For purposes of determining “adjusted gross income,” section 62(a)(2)(A) allows an employee a deduction for expenses allowed by part VI (section 161 and following), subchapter B, chapter 1 of the Code, paid by the employee, in connection with the performance of services as an employee of the employer, under a reimbursement or other expense allowance arrangement with a payor (the employer, its agent, or a third party)."


Which then leads us to "Chapter 1. NORMAL TAXES AND SURTAXES Subchapter B. Computation of Taxable Income Part VI. ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS" which includes sections dealing with all sorts of expenses including depreciation as follows:

"Section 167. Depreciation

(a) General rule There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—

(1) of property used in the trade or business, or
(2) of property held for the production of income."


Accordingly, per review of above-mentioned guidance, it would seem that all properly allocable business-related costs of the home office would be reimbursable and therefore deductible by the corporation, including mortgage, interest, property taxes, and depreciation. Am I missing something here?

Another question -- if the corporation is reimbursing the shareholder for the depreciation, is there a basis adjustment for the shareholder's residence which may result in recognition of Section 1250 Unrecaptured Gain when the property is subsequently sold?

I welcome your thoughts. Thanks in advance!
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#2
JAD  
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You ask if you are missing something, but you linked to the discussion where the issues and lack of guidance were discussed. We do not have certainty.

If the corporation is reimbursing the shareholder for depreciation, then how could the shareholder NOT have 1250 issues upon disposition?
 

#3
AlexCPA  
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Thank you -- I appreciate your feedback as always. It seems, however, that it would be difficult to establish the basis reduction resulting from prior reimbursed depreciation given that the depreciation would not be shown anywhere on the shareholder's Form 1040. Is there an efficient way to establish the amount of the basis reduction for a new client aside from asking the client/prior preparer?
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#4
JAD  
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Nope. It's a good question.
 

#5
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AlexCPA wrote:Thank you -- I appreciate your feedback as always. It seems, however, that it would be difficult to establish the basis reduction resulting from prior reimbursed depreciation given that the depreciation would not be shown anywhere on the shareholder's Form 1040. Is there an efficient way to establish the amount of the basis reduction for a new client aside from asking the client/prior preparer?


Since it is an accountable plan, should the TP not have records of what expenses were reimbursed, including any amounts for depreciation? After all, the TP is the one who accounted for them. TPs always need to be reminded that it is up to them to track basis in any asset. Why would the preparer of the 1040 be tracking basis for him/her since accountable reimbursements usually do not show up on a 1040? I would ask the client for his records.
 

#6
migbike  
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Also curious about how this would interplay with "You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater."

I guess whether or not it's 'allowable' is at the discretion of the S-Corp doing the reimbursements?
 

#7
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I'm pretty sure that the "allowability" of the depreciation would be determined by the Internal Revenue Code and not by the S corporation.
 

#8
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If the S corp is reimbursing the TP for depreciation, isnt the TP therefore renting the space to the S Corp and should file a Sch E?
 

#9
AlexCPA  
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If the S-corporation is reimbursing the shareholder for depreciation, then that would need to be handled through the use of an accountable plan, in which case the S-corporation would not be renting the property from the shareholder. If, however, an S-corporation does not have an accountable plan in place, then the S-corporation can rent the property from the shareholder. These are typically mutually exclusive arrangements.
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