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I am a member/manager in an LLC taxed as an S corps. On the…

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Hello -- I am a...
Hello -- I am a member/manager in an LLC taxed as an S corps. On the advice of another tax expert, I have invoiced the LLC for my cell phone bill (which I use mostly for business but pay for out of my personal account). Is the company required to reimburse me by check/cash, or is it possible to reimburse me in the form of increased equity in the LLC? (The other tax expert I dealt with said that this is NOT possible, but I did not understand her explanation of why.)
Submitted: 2 years ago.Category: Tax
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3/10/2016
Tax Professional: Lev, Tax Advisor replied 2 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,274
Experience: Taxes, Immigration, Labor Relations
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If that is a company cell phone - the cost is deducted on the company's tax return.

However - if the cell phone is used for both - personal and business purposes - you would need to determine the percentage of business use.

The portion of personal use is reported as your wages.

We still need to treat you as a physical person and S-corporation - as separate entities.

S-corporation is your employer - and pays wages for your services - so when your employer provides you a cell phone for personal use - that value is classified as fringe benefit - a form of compensation.

Just an illustration example...

Assuming total annual cost of the cell phone service is $1200.

You determined that 80% of calls are business related and 20% are personal.

So the personal use is $1200 * 20% = $240 and business use is $960.

Thus - S-corporation will deduct business use of cell phone $960

and will deduct $240 fringe benefits as wages

wages will be reported to you on W2 form and will be taxable on your personal tax return.

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Customer reply replied 2 years ago
you didn't answer my actual question. Can an LLC member be compensated for such an expense with company equity as opposed to cash? And if not, why not?
Tax Professional: Lev, Tax Advisor replied 2 years ago

We need to be clear that the LLC is S-corporation and equity in the corporation is represented by shares.

The LLC member in this case is a shareholder AND an employee of S-corporation.

The compensation for services is wages.

So your question would be if S-corporation is allowed to compensate employees for his services with additional equity (that are shares of S-corporation) ?

Yes - that is possible - the corporation may issue additional shares and give shares to employee (including employees who are already shareholders) - and in this case the fair market value of shares will be reported as wages.

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Customer reply replied 2 years ago
That sounds like it would actually be more costly to the shareholder/employee than simply reimbursing him with cash for his cell phone bill, yes? (Costly in terms of the wages he would then have to report on his personal tax return.)Another JustAnswer expert recommended that the cell phone invoice to the LLC include a 2% fee for the "convenience of the employee having paid the cell phone bill themselves all year," with the fee reported as wages. Would you recommend that as well? Why or why not?
Tax Professional: Lev, Tax Advisor replied 2 years ago

The issue is wha you are trying to achieve?

If you will be receiving something valuable that you did not own before - that will be your taxable income.

But we are talking about S-corporation - so you already own 100% of corporation shares - correct.

So if you own 1000 shares and contributed $5000 into your corporation - your basis is $5 per share.

If for some reason the corporation want to issue another 1000 shares and just give them to you - you will be owning 2000 shares - but if nothing is contributed - you total basis still will be $5000 or $2.5 per share.

Nothing is taxable here - but you received nothing - as you continue to own 100% of corporation shares.

So you had 100% of equity and still have 100% of equity - just different number of shares and NO taxable income.

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Customer reply replied 2 years ago
Thank you for your reply. Could you address the second part of my question?Another JustAnswer expert recommended that the cell phone invoice to the LLC include a 2% fee for the "convenience of the employee having paid the cell phone bill themselves all year," with the fee reported as wages. Would you recommend that as well? Why or why not?
Tax Professional: Lev, Tax Advisor replied 2 years ago

We are talking about reimbursements for using cell phone for business purposes - correct?
So we need to apportion personal use and business use.

Only business portion s deductible.

If the cell account in your name - the best approach I think woudl be to have S-corporation reimburse you for business expenses.

You will provide report how phone is used - for instance 60% for business and 40% for personal - and S-corporation reimburses you business portion on monthly basis.

Here I do not see any reason for convenience charges - as ONLY business related expenses are reimbursed.

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Customer reply replied 2 years ago
reimbursements for the business portion of our cell phone use. I'm glad you concur that the 2% fee seems extraneous in this case.
Tax Professional: Lev, Tax Advisor replied 2 years ago

It might come in the picture if you corporation have several employees and customary provides free personal cell as fringe benefits - in this case that additional fee might be appropriate.

Otherwise - I do not see any reason.

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