Part 2 QBI, Credits, NOLs and Accounting Methods question: sole shareholder's personal credit card bills from the business account

Part 2QBI, Credits, NOLs and Accounting Methods

An S corporation with no C corporation history pays its sole shareholder's personal credit card bills from the business account, with no plan to repay. How are the payments best treated?

A As loans that are ignored for tax purposes
B As deductible business expenses of the corporation
C As distributions that reduce her stock basis
D As guaranteed payments reported on her K-1

Show the answer and explanation

Answer: C. As distributions that reduce her stock basis

Personal expenses are never deductible by the business (section 262). Paid for the shareholder without a bona fide loan, they are distributions under section 1368, reducing stock basis (tax-free to the extent of basis for an S corporation without E&P), and must be watched for the one-class-of-stock and reasonable compensation rules. Guaranteed payments exist only in partnerships. Source: IRC 262, 1368; Treas. Reg. 1.1361-1(l)(2); Form 1120-S instructions (2025), Schedule M-2. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Deducting personal expenses because the business account paid them.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.