Q&A: When "business" expenses don't go toward your business

January 23, 2009

Is my practice liable for a partner's questionable business expenses?

Q: Two partners in our practice are quite aggressive with their "business" expenses and not only deduct their cars, cell phones, and personal computers, but often purchase sports tickets for children, take family members out to dinner, and pay various household expenses and code them as "promotional expenses." Although our income division contract charges back such expenses against their bonuses, several of the partners who are less tax-aggressive are concerned about our legal liability. Are we responsible for their actions?

A: Since your corporation is taking the deductions for these expenses, the Internal Revenue Service would likely pursue the corporation, not the individual physicians who are taking inappropriate tax deductions. Therefore, your interest in the corporation's accounts receivable and hard assets is at risk because of your partners' actions. To address this problem, some groups enter into agreements requiring the tax-aggressive physician to be solely responsible for any resulting taxes or penalties. It is commonly drafted as a "hold harmless" provision in a shareholders' agreement. Alternatively, you can simply limit aggressiveness by fixing a maximum dollar limit for perks.