Business owners, especially those who operate in corporate form, need to realize that there is a difference between advancing business funds to cover anticipated expenses and being entitled to a deduction for those expenses. A married couple who held partial interests in a corporation learned that difference to their detriment recently in the Tax Court (Aleamoni, TC Summary Opinion 2016-21) when they were not allowed to deduct advances they made to the corporation as business expenses on their Schedules C. The court held that the advances were investments and not expenses the taxpayers incurred in carrying on a trade or business.
An advance made by a shareholder to a corporation for the use of the corporation in furtherance of its business is an investment in the corporation, whether the advance is in the form of a loan or a capital contribution. In either instance, the shareholder hopes to profit as an investor through (1) the receipt of interest on the loan or the receipt of dividends on the stock and, regardless of the nature of the investment as debt or equity, (2) an increase in the value of the stock through the corporation’s becoming a more viable profit-making enterprise. Therefore, the advances were not deductible regardless of their characterization as loans, as capital contributions, or as covering business expenses.
In addition, because a corporation’s business is distinct from that of its shareholders, officers and employees, the couple in this case may not deduct expenses which promote the business of the corporation. Finally, although the IRS had previously examined the taxpayers’ Schedules C for at least two prior tax years and allowed – through mistake or inadvertence – the deductions claimed for advances to the corporation, the IRS was not precluded from challenging the taxpayers’ treatment of the advances in a later year.