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How founders of a c-corp can report/show and be reimbursed for their incorporation-related expenses?
Anonymous2 views3 answers
The expenses (incorp. services & fees, registered agent, virtual office, hosting etc) were paid from personal funds within 2014. The receipts were issued mostly in the name of one of the founders. Though the actual expense was 50:50 (ownership proportion) as the founders paid back each other the half of incurred expenses in cash.
The question is how/when (and whether) to report and reimburse those expenses. The simpler the better.
We could not reimburse them in 2014 as there was no income. Can we claim/reimburse the expenses in 2015 to avoid reporting them as a shareholder's loan in 2014 (due to potential consequences)? Or can we just report it on our general ledger as an additional paid-in capital contribution (if it doesn't require additional corporate paperwork)? Any other ways?
Generally speaking, the tax code treats organizational and start up expenses in one of several different ways depending on the particular circumstances. As a general rule, organizational expenses are not deductible; however, under section 248 of the Internal Revenue Code the corporation is allowed to deduct some or all of those expenses, but only in the year in which the corporation first begins business. Thus, even though the corporation was formed in 2014, if it didn't begin business until 2015, then it could not deduct any of the organizational expenses until 2015 at the earliest.
With respect to how the expenses could be treated for book purposes, since the founders each evened up their contributions so that they each bore 50% of the economic cost of those expenses, the expenses could be booked to the corporation as contributions to the corporation's capital; the corporation should then be able to deduct some or all of those expenses depending on whether a deduction is otherwise allowed (generally speaking, if the organizational expenses were less than $5,000, they are likely to be fully deductible for the year in which it begins business).
Depending on when the corporation actually begins business, other start up costs, such as the rent on the virtual office or the hosting expenses, would generally not be deductible; however, once again, the tax code provides the corporation with the ability to deduct a certain portion of those expenses for the year in which it begins business under section 195 of the Internal Revenue Service.
Once the corporation begins business, it should be able to deduct all of its ordinary and necessary business expenses, such as the rent on the virtual office and ongoing charges for hosting, and etc.
Again, to the extent the founders paid out of pocket for start up expenses, they could be booked as contributions to capital by the founders.
You should get an accountant or CPA on board now to assist you with the corporation's ongoing activities; that person will be able to fully advise you on the proper treatment of the various expenses you asked about.
I think this question better be asked of your CPA not a lawyer as legally it makes absolutely no difference what you do with your general ledger. And it also depends if you want it to be part of your equity into the company or a loan to the company. in the second case you will have a first priority lien. In any event we are talking about such minimal investment that it probably doesn't make much of a difference how you report it and if your corporation still doesn't make money next year than why have it open?
Organizational expenses typically are not a deduction, but the other expenses should be deducted when paid on the 1120. This might create a loss carryforward. This sounds simple and you should hire a CPA or professional tax preparer complete the 1120 and review your records.
Good luck in your new business!
Ron Cappuccio
