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Q: Now, how does the borrower report the income (that was ultimately used for materials) on his tax return to offset the difference between the amount he received and the amount he reported on the 1099's to subcontractors when the project is still ongoing in to the next tax year?
A: The 95k in materials is reported as Cost of Goods (COGS), on page 2, Part III, of the Schedule C.
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I thought you were referring to an independent contractor. However COGS will still apply. Line 36 of Part III reads as follows; Purchases less cost of items withdrawn for personal use. This is where the 95K will be entered.
Link to Schedule C:
My apologies, I see where you are referring to the borrower as being the person wanting to deduct the $95k. The cost of the materials gets added to the cost basis of the property and is not deductible until the property is sold. The borrower is not allowed to take a deduction at this point.
No, you don't have to answer your own question, maybe someone else can. I am releasing the question back into the queue.
My understanding is that the Contractor is NOI a borrower and did not receive a loan - BUT received a payment for services - which the bank is reported on form 1099misc.
If the contractor is cash based taxpayer - that amount is reported into his/her income as it was constructively received.
That is regardless if the project is overlapping two tax years.
If the contractor is an individual - that amount is reported on schedule C as gross income.
Expenses are correspondingly deducted.
The cost of materials will be deducted an amount paid to subcontractors as well - and will be reported on forms 1099misc sent to each subcontractor who is paid more than $600.
If you as a general contractor HIRE teh borrower to perform some work - that amount will be reported the same way as for other subs.
If you allow the borrower to purchase some materials - be sure to collect receipts and keep for your record.
If you simply return some money to the borrower - you are still responsible for that amount as it is reported to you as a contractor.
You wrote that the Borrower controlled funds - that is OK - but the control is exercised but but taking over the GC - but negotiating with the bank that funds are provided in steps upon approval from the borrower.Based on your explanation - the borrower is taking over and wants to act as a GC not only monitoring the building process, but having an authority to hire subs and purchase materials.That is not how the contraction loan is working.In such situation If the bank agrees to provide funds directly to the borrows - that would be the situation you want.If the bank disagrees - unused funds must be returned to the bank - and the borrower would likely need to present a different GC who will take over the project.
It is possible that the borrower will present himself as the GC - subject to the bank approval.
The issue is not that the borrower received funds - that is a loan for the borrower and as he is responsible to pay that loan back - that is not his taxable income.
The issue woudl be with form 1099misc that is sent to contractor - as you originally pointed out - and should NOT be sent to the borrower.
If the bank sent 1099misc to the borrower - that is not correct - and you would need to communicate the bank asking to correct that mistake.
If you take a position that the borrower is acting as a general contractor - and that is his business activity - then - you are correct - income woudl be reported on schedule C as for self-employed person - and he will be responsible for both - income and self-employment taxes on net business income.
However - because the project is still ongoing in to the next tax year - and not all funds were spent during the tax year - I do not see how you could report zero profit/loss.
I would expect to see a positive income.
The borrower may act as a general contractor - that is not an issue - however as I mentioned - in this case - there should NOT be any reporting forms
Whether the bank agrees to accept that person as a general contractor - that is another issue - there might be some additional requirements.
But if expenses are more than reported income - I do not see any issues from IRS prospective.
That is correct - if the money are issued to the borrower - there is no reporting form.
However based on current practice - the bank is financing construction and is using the property to be built as a collateral.
They do not want just to give the money to the borrower - so the borrower will use the loan as he wish - but ONLY for the construction as agreed.
When the borrower just takeover the construction - that might be a violation of his agreement with the bank - but that woudl not be a concern of the IRS.
Whether the borrower is acting in the capacity of the general contractor or subcontractor - he is a self-employed person.
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