When a corporation pays for an expense on behalf of a shareholder-employee and such payment is deductible for tax purposes by the corporation, it is also non-taxable to a shareholder-employee (i.e., it is not considered to be compensation). Through awareness of such opportunities, shareholder-employees are afforded the ability to take a portion of their respective shares of distributable income in this fashion, as opposed to accepting payment in the form of taxable compensation. Following are important categories in which such opportunities may exist for you and your corporation:

  1. Currently Deductible Expenditures.

    1. Health Insurance. The corporation can pay for health insurance premiums for a shareholder-employee and the shareholder-employee’s dependents. This is totally deductible by the corporation and is a significant benefit as full family health insurance premiums are nearing $1,600 per month and more.

    2. Dental Insurance. The same deduction holds true for dental insurance which is approximately $250 to $500 per month.

    3. Unreimbursed Medical and Dental Expenses. A corporation can deduct fully all uninsured medical expenses. Conversely, if an individual shareholder-employee attempts to deduct the expenses for him- or herself, the deduction is limited to those expenses which exceed 7½ percent of a shareholder-employee’s adjusted gross income. Accordingly, medical and dental expenses are basically nondeductible if paid by a shareholder-employee him/herself. These expenses include things like uninsured medical (including eye care) dental, orthodontia, mental health, counseling, prescriptions, chiropractic, and physical therapy.

    4. Personal Liability Umbrella Insurance. The corporation can reimburse a shareholder-employee for the shareholder-employee’s personal umbrella insurance, if the corporation requires the shareholder-employee to carry such insurance.

    5. Mileage Reimbursement. A corporation can reimburse a shareholder-employee 51 cents per mile of the business use of the shareholder-employee’s vehicle. Annual unreimbursed mileage expenses for shareholder-employees can be as much as $2,000 to $3,500 for a single year. This amount includes mileage incurred in traveling to and from continuing education seminars, trips to meetings, the bank, the post office, etc.

    6. Continuing Education, Dues and Subscriptions. All continuing education fees, business membership dues, and subscriptions are tax deductible, if paid by the corporation on behalf of a shareholder-employee.

    7. Use of Residence for Corporate Business. Shareholder-employees who host business functions at their homes may be reimbursed by a corporation for all costs of such functions. In addition, the corporation can lease the residence from the shareholder-employee for the event.

    8. Cell Phones. The use of cell phones for corporate business is tax deductible and so may be supplied to employees at no cost to them.

    9. Costco Card. A Costco card may be supplied to employees who use the same for corporate business.

  2. Deferred Expenditures. Deferred expenditures include payments made on behalf of an employee for disability insurance. A shareholder-employee may pay for his or her disability insurance for an given policy year and if the shareholder-employee has not become disabled during that time period, the corporation may reimburse the employee for payment made. If the shareholder-employee does become disabled during that time period, the disability income payments will be made to the shareholder-employee on a tax free basis.

  3. Professional Fee Expenditures. Accounting and legal expenses paid by a shareholder-employee are typically nondeductible expenses. However, if such payments are made by the corporation, they become deductible expenses. For this reason, many corporations pay a portion of the personal accounting and legal expenses of their shareholder-employees as a fringe benefit.