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We have seen people get slapped for this many times.

The transaction is deemed to occur as though Company A distributed the money to Owner, then Owner paid the expense for Company B. (3) Owner of Company A is charged with a constructive dividend, which is nondeductible to Company A and taxable to the owner. (2) Company B does not get a deduction for the expense because Company B didn’t pay the expense. (1) Company A does not get a deduction for the expense, increasing its net profit, thus increasing its federal income tax (if a C corporation) or the owner’s income tax (if a S corporation) If Company A pays one of Company B’s expenses, several things happen and none of them good: īut to save you some time, here’s the moral of the story: Company A must pay its own business expenses in order to take a deduction. You can also read an excellent write-up of the case by the guys at Procedurally Taxing. Read the consolidated case of Key Carpets, Inc. If you own more than one business and sometimes have Company A pay the expenses of Company B, or perhaps task an employee of Company A to do things for Company B, you’re headed for trouble unless your bookkeeping and accounting staff are on top of their game. A recent decision by the Tax Court should serve as a warning to people that own multiple businesses but don’t always “respect the corporate formalities” associated with each business entity.