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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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I have a client that is an s corp. He hired his own company ...

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I have a client that is an s corp. He hired his own company to build a house that he is going to sell personally. Prior accountant reflected income and expenses on tax return in regards XXXXX XXXXX transaction.
Submitted: 6 years ago.
Category: Tax
Expert:  RD replied 6 years ago.

HiCustomer

Thank you for asking your question on Just Answer. In order to address your question I would need the following information-

Is the S Corporation into construction business? Why does he want to build a house and sell it personally?

What is your specific question in this regard?

Customer: replied 6 years ago.
Client got a personal construction loan to build house and sell to make money. House is empty and on market. Unfortunately, he will lose money upon selling it. Client prepared invoice from s corp to him personally and applied money as income on the books. All the expenses for the house are shown on the books as well. He says he is a client of the s corp. I am helping bookkeeper adjust books to tax return. Ea prepared tax return who I have spoken to and she thinks tax returns ok. Bookkeeper is different person. Client hired me to fix financials so he can get a bond. I believe the money is loan from shareholder not income and the expenses are paying him back. We are talking about over a million dollars. The house they built is not in the s corp. He is in the construction business.
I am uncomfortable with the money shown as income on the profit and loss and the expenses also. How can he be a client of the s corp?

Thank you
Expert:  RD replied 6 years ago.

As an officer of the S Corp, the client gets salary from the S Corp. As far as S corp is concerned the entity and the officer are separate person and hence the S Corp can sell the house to the officer. The sale would be recorded in the same manner as a sale to any other person.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
RD and 2 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
You have misunderstood the issue. House is not for sale from s to personal. Officer had s corp build the house. Shareholder owns the house which is vacant. He had s corp submit bill to him personally for the building of the house and he reflected the income in sales and the expenses on the profit and loss as if the shareholder is a client of the s corp. He got a loan from the bank personally to build the house. I believe that the money given to the s corp is loan to shareholder as you cannot be a client of your s corp.
Expert:  RD replied 6 years ago.

I had referred to the same situation that you described above. The officer is a customer of the S Corp and he got the house built by the S Corp for his personal investment purposes.

Since S Corp is a separate entity, the stockholder can be a customer of the entity. However this would be considered a related party transaction and the issues may arise in a situation where the transaction takes place a below fair market value.

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

Customer: replied 6 years ago.
I do not understand how the shareholder can be a customer of his own company. That is like myself charging my company for my own tax return that I prepared.......I do not understand how that is possible, please provide some authority that I can research into, this just does not make sense to me. Or some regulation to support your answer.

Thank you.
Expert:  RD replied 6 years ago.

It is similar to having a single member LLC to own the property and than sell it to the S Corp in which the single member is the sole stockholder. These kind of arrangement are quite frequent in construction business.

I would suggest you to look into related party transactions.

Please note that a S Corporation is a separate entity and hence the transaction is between an entity and stockholder. It is not a sole propreitor entity where you cannot buy or sell to yourself.

Even if you are a 50% stockholder of a C Corp- eg. MSFT- you can buy the software from the corp ....only concern would be that the transaction takes place at arms length.

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

 

Customer: replied 6 years ago.
It is not about selling the house it is about building the house. The shareholder received a construction loan from the bank and had his corp build the house for him to sell personally. The money was then deposited into the scorp bank account as income. The expenses of the build were then reflected on the income statement. This is the issue. How can a shareholder be a client of his corp? The house they built is not in the name of the corp but in the shareholders name personally. I will look into related party transactions.
Expert:  RD replied 6 years ago.

If the shareholder received the construction loan and gave that amount to the S Corp as payment towards construction than the S Corp can report this amount as income and all the related expenses as expense on income statement.

Once again just as the S Corp shareholder can be an employee of the the S Corp, he can also be a client.

I will try to find some regulations and post it for your reference.

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

Customer: replied 6 years ago.
Thankyou, I will accept your answer, but it would be great if you could find a regulation to support related party transactions.

Thanks so much.

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