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Stephen G.
Stephen G., Sr Income Tax Expert
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I have a client who has several S corporations. One corporation

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I have a client who has several S corporations. One corporation rents from the other. The one renting the building paid for engineering fees to build a building the other corporation has on its books. I don't think I should expense those fees, but how would I capitalize & amortize them since the corp renting doesn't own the building. I'm not sure how to code them and over what period of time to amortize the costs.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Lev :

Hi and welcome to Just Answer!
If payments are made on behalf of the landlord - generally such payments must be classified as rental payments and included into income of the landlord. So the landlord will be able to claim appropriate deductions.
Another option to treat such payments are leasehold improvement property - which is treated as a separate property for income tax purposes. The leasehold improvement property may be depreciated.

Lev :

See for instance this article - http://www.cshco.com/News/Articles/IRS_clarifies_capitalization_of_leasehold_improvements/

Customer:

The invoices for the engineering are made out to the corporation who paid them.

Lev :

The name on the invoice is not so important.

Customer:

Could you please release this question. I'd like to ask a CPA, thank you.

Lev :

No issues - I will opt out.

Expert:  Lev replied 1 year ago.
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Expert:  Stephen G. replied 1 year ago.
Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Is it possible to set the costs up as a receivable on the books of the S-Corp; from the other S-Corp. that owns the building?

The S-Corp would then record the engineering costs as part of the building and amortize (depreciate) them along with the cost of the building. The S-Corp that owns the building would record a payable to it's "sister" S-Corp in the amount of the engineering costs initially paid for by the lessee S-Corp.

The "inter-company" receivable/payable could be settled a number of ways, possibly over a longer period of time by reducing the actual rent payment (not the expense) & crediting the receivable on the lessee's books and reducing (debiting) the payable on the S-Corp lessor's books.

There's also nothing wrong with what the other expert recommended to you. It comes down to what your client wants to do. If he/she isn't involved & doesn't understand, if it were me I'd follow my suggestion as that would be the least disruptive to normal operations while at the same time getting both the expense and the financing (payments) in the right place.

PS I'm a retired CPA & have handled many of these situations where the owners don't respect the integrity of their various inter-related entities.
Customer: replied 1 year ago.

That's exactly the issue. He doesn't understand. The owner requested the work through the lessee corporation and paid it through that one. He has no intention of paying it back if I were to set up a receivable. And the rent they pay conveniently is the amount of the mortgage payment of the lessor corporation. And that return has already been filed without those costs capitalized. I just don't think a $15,000 deduction in this year for engineering cost would look good on a return of a corporation who rent it's space. So it looks like my only option now would be to record it as a leasehold improvement... Would you do that or amend the other return at this point.

Expert:  Stephen G. replied 1 year ago.

Since they are both S-Corps with common ownership I wouldn't be too concerned about recording it as a leasehold improvement.

I'd rather see the engineering costs where they belong as part of the building, but I wouldn't want to record a receivable/payable that never got settled either.

So it sounds like the "leasehold improvement" (depreciated as a building component over the same depreciable life as the building) is the lesser of 2 evils.

I'd probably call it something other than "leasehold improvement"; say "Building Expansion Costs" or some other description that is more descriptive of what is actually going on.

I definitely would not expense those costs & I wouldn't amortize them over a short period. Where the owner controls both sides of a lease, that distinction (as a leasehold improvement to gain a faster write-off) is without any basis in fact. That's why I would depreciate the costs the same way as they would be depreciated if they were properly recorded as part of the building.

Of course, the other option is to settle the receivable/payable through the shareholder distribution accounts without any transfer of funds.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4047
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 7 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

And because the other corporation has been filed, I'd have to amend it to do the receivable/payable option. But I agree I'd rather the eng costs be with the building... sometimes I want to shoot my clients. :)

Expert:  Stephen G. replied 1 year ago.

You mean you haven't killed any of them yet?

I use to have a little fake URN on my counter that said "Ashes of Difficult Clients".
Just to be funny I used it for my cigar ashes, (when I smoked cigars many moons ago);

We got a lot of comments about it & when someone was giving me a hard time, I'd just point to the URN. We had a lot of fun with that.

Steve G.

 

PS You're right, to do that requires amending as you originally pointed out. In the long run you & the client will be better off.

 

PSS He needs a lecture!!

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4047
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 7 other Tax Specialists are ready to help you

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