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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16544
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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what happens if you are a real estate company and you accrue

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what happens if you are a real estate company and you accrue legitimate expenses in year 1 a closing occurs at the end of year 1. but for some reason they did not get paid in year 2? do you pick them up as income in year 2 or ammend the return of year1?

MyVirtualCPA :

Thank you for your question, and thanks for using JustAnswer.com

MyVirtualCPA :

So, the closing happened at the end of year 1, and you had legitimate expenses incurred in year 1

MyVirtualCPA :

But you did not pay the expenses until year 2.

MyVirtualCPA :

Are you cash basis or accrual basis?

Customer:

accrural

MyVirtualCPA :

If you are accrual basis, then you will deduct the expense in year 1

MyVirtualCPA :

Because that is when it was incurred

Customer:

the expenses never were paid?

Customer:

When do you pick them up as income?

MyVirtualCPA :

Correct...even though you did not pay the expense until year 2, if you are accrual basis then you will still deduct the expense in year 1

MyVirtualCPA :

You pick up income in the year it is earned

MyVirtualCPA :

So, the income from the closing at the end of year 1 would be claimed as a year 1 income, even if you did not receive proceeds until year 2/

MyVirtualCPA :

Publication 334 is a good resource for you for this question

Customer:

so you dont misunderstand the question it is a bit unusual. real estate company A sold a piece of real estate in year one expenses were accrued properly in year 1. the cfo did not tel the ceo that there needed to be money left over at the closing to pay the bills. The bills subsequently do not get paid. since the closing occured late december. based on accrural accounting do you ammend the year 1 return or pick it up as income the next year?

MyVirtualCPA :

You can access publication 334, here: http://www.irs.gov/publications/p334/ch02.html

MyVirtualCPA :

You amend the year 1 return

MyVirtualCPA :

to recognize the income and expenses from closing that happened in year 1

Customer:

thank you.

MyVirtualCPA :

You're welcome

MyVirtualCPA :

Please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today

Customer:

I will may i ask another question?

MyVirtualCPA :

Yes

Customer:

can indevidual tax payer be on the accrural basis? If a real estate investor has numerous llc which are disregarded entities?

MyVirtualCPA :

Typically individuals are on the cash basis. It can happen, but is rare for an individual to be an accrual basis taxpayer

Customer:

but it is allowed?

MyVirtualCPA :

Yes, it is allowed

MyVirtualCPA :

If you have complex taxes like this, you should really take them to a professional. especially if you are trying to do returns with multiple disregarded entities etc

Customer:

tk. What would happen if an accountant refused to show a client the return?

MyVirtualCPA :

An accountant cannot refuse to show a client the return

Customer:

I am but i need to have a basic understanding?

MyVirtualCPA :

Once the services are paid for, the tax return is the property of the client

MyVirtualCPA :

Yes, your accountant should go over, in detail, what they have prepared on your return and why

Customer:

What would happen if they dont? and for an extreem example the irs audits the return that the client relied on oral understandings of the tax due? Are ordinary people suposed to be able to read a return and know if an accountant made a mistake?

MyVirtualCPA :

The client is supposed to be responsible for everything prepared. The accountant can make mistakes, but should be willing to "make it right"

Customer:

Even thou a client does not understand accounting? What if the accountant walks away?

MyVirtualCPA :

Well, if the accountant walks away another accountant could be hired and they should be able to review the return, talk to the client, and understand what's going on

MyVirtualCPA :

But, the taxpayer is always ultimately responsible for what is on the tax return.

Customer:

this was a very complicated. An accountant who was more like a cfo for 15 years always reviewed the financials but in year 16 and 17 did not. there were numerous disregarded entities. all reaI estate companies. I could have made other dissensions. ie 1031 exchange. However I totally relied on his advice. He was in complete control of the books records bills etc. He made serious errors. I was unaware. Are you saying the accountant gets a pass and I am responsible? why hire a cpa?

MyVirtualCPA :

He does not get a pass. If he made gross errors as the preparer he can be in trouble.

MyVirtualCPA :

However, this is a complex situation and I would not recommend trying to fix the mess on your own. I would hire a new CPA to go over the return and make adjustments

Customer:

how?

MyVirtualCPA :

Well, if he made errors and they were on purpose he can get in trouble.

MyVirtualCPA :

If you wish to gain a better understanding of accounting, and how to account for items, I would recommend a course at your local community college or online.

MyVirtualCPA :

There are tons of great programs out there

Customer:

I am engaging the appropriate help now. However I did not understand this at all. If he made purposeful errors what would happen?

Customer:

you have been great tks.

MyVirtualCPA :

You're welcome. If he made purposeful errors you can make a complaint with your state board of accountancy and they will investigate

MyVirtualCPA :

Once satisfied with the answer, please rate as "excellent" so that I may receive credit for assisting you today

Customer:

Thank you very much for your help.

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