The Tax Resources Blog

Archive for June, 2011

Tax Deductible Expenses Corporation

Question: Constructive Dividends taxed at what rate?

If the IRS was auditing a corporation and found that the corporation was deducting personal usage of the automobile and personal travel and entertainment expenses there would be a constructive or disguised dividend that would be taxable to the shareholder. The constructive dividends would be taxed on the Form 1040 at the ordinary Income rates or are they taxed at the qualified dividend rate such as at the capital gains rate at 15%. If the answer is qualified dividend rate at 15%, why would the shareholder be rewarded with a preferential tax rate if they deducted non- deductible personal expenses on the Form 1120. Please provide an authority for your answer such as the specific IRC or IT Regs section or any court cases that back up your answer.

Answer: Don’t quote me on this because I’m not sure if this varies by state, but I ran into this same issue a few years ago. I asked both my lawyer and accountant and they both told me that the qualified dividend rate would be used in this scenario.

Podcast 20 Jan 2011 Group Insurance and PHSP.avi