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HOW CAN MIS-PLACED TRANSACTIONS BE CORRECTED? Looking to…

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HOW CAN MIS-PLACED TRANSACTIONS...

HOW CAN MIS-PLACED TRANSACTIONS BE CORRECTED?
Looking to help a CEO/Shareholder of three separate companies (different EINS for a C-Corp holdings/servicing company, an S-Corp manufacturing company and a third C-Corp IT web & helpdesk support). The CEO withdrew from the IT C-Corp some equity, with instructions to the CFO to deposit the monies to the C-Corp (holdings company to purchase assets (for lease) and purchase products and materials (for sales). However, the CFO erroneously deposited the funds to the S-Corp manufacturing company against notes payable to the C-Corp (IT company), and used the funds to purchase production equipment and/or pay expenses in the S-Corp (manufacturing company). A year later, they're still trying to figure out how to correct this, having already filed 2016 taxes.Received suggestions this would impact "income" of the S-Corp (manufacturing company) to move its assets/expenses to the C-Corp (holdings company), and require 2016 taxes be amended. Or if specific assets/expenses can be identified, the N/P can be moved to equity, and then an equity transfer can be made of the "assets and expenses" between the C-Corp (holdings company) and S-Corp (manufacturing company) to correct the original mishandling. Need help to brainstorm, and identify possible solutions and affect on taxes! Can you help? Joanne Salas

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

What else would help them fully understand? Trying to clarify, the CFO should have deposited C-Corp (IT Svs Co) withdrawal intended for the C-Corp equity (holdings company) to buy equipment to rent and purchase goods to sell to manufacturing companies. However, funds were erroneously deposited directly to manufacturing company to purchase small assets and manufacturing materials, and pay some expenses. Can this be corrected between his companies?

Submitted: 6 months ago.Category: Finance
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Answered in 4 days by:
3/23/2018
Financial Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 5 months ago
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 1,761
Experience: Former IRS Revenue Agent
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I'm Fiona, former IRS revenue agent. I am looking at your question and will get back to you soon. Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP,IMTA

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Financial Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 5 months ago

Dear Customer,

What could have been affected is the depreciation expenses.

It possibly best to simply sell the assets with its liabilities to the company where it belongs. This is inter-company sales in 2018. Nothing for the prior year moves.

The same method can be used for all small purchases done incorrectly.

The larger items can use sales and the smaller items can use inter company transfers.

The note description in the accounting record, however, simply say that to correct prior mistakes. There should be not much tax differences. As long as the three companies' income and expenses are not much affected, the IRS should not scrutinize the transactions and effects. The IRS does not want us to manipulate income and expenses among related entities.

Also, the income tax was done correctly reflecting the reality even if it was caused by mistakes.

Please feel free to follow up.

Regards,

Fiona

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Customer reply replied 5 months ago
Hello Dr. Chen, I didn't realize you had responded days later! Thank you! I just figured nothing could be readily corrected based on brief conversations with other CPAs. I believe the charge of this service permits additional follow on this specific matter? May I please clarify my understanding, and be sure of your reference to INTERCOMPANY SALES (dealing with three separate companies, 2 C-Corp, 1 S-Corp where the one shareholder has most equity in each of these companies, but there are other shareholders, too).While I am MOST OPTIMISTIC that we can CORRECT prior year mistakes in current 2018 without prior year tax adjustments (to the IRS, it is simply recognizing and adjusting for the human errors that were made that we're trying to achieve), I need specific guide on the ACTUAL ACCOUNTING ENTRIES that would need to be made for these situations:How would we adjust for of both larger assets (INTERCOMPANY SALES) and smaller assets (INTERCOMPANY TRANSFERS), and associated liabilities? (My long research brought me to Clearings and/or Wash accounts to "adjust" between INTERCOMPANIES (all three companies have different EINs, is this still Intercompany?)What is considered "insignificant" for adjusting the INCOME and EXPENSES paid? The initial equity withdrawn from IT Corp that was ERRONEOUSLY added to MFG S-CORP that should have been added to HOLDINGS C-CORP was around $350k.
What would the accounting adjustments look like to correct back EXPENSES in current year?I am holding my breath on your reply Dr. Chen! The CEO just wants us to CLEAN UP company files as was truly intended!
Respectfully, ***** *****
Financial Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 5 months ago

Dear Customer,

It is interesting. It is not only the assets were purchased in the different company's account, for 350K, the other company simply charge the depreciation? Hopefully, they did not also take bonus depreciation or section 179 depreciation.

If you are interested in working out accounting entries, would you please state all the current accounting entries done by each company and the money transfers so far, from 2016 or earlier to 2018?

Regards,

Fiona

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Financial Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 5 months ago

p.s. Please also provide shareholders and type of businesses for the three company. You may want to say shareholder A, B, C and percentage ownership. Are they all in the same location so that the 350K assets can be received by another company but locate in the same location to be used by the other company? Who actually received the equipment and used the equipment?

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Customer reply replied 5 months ago
To clarify, nothing has been done, other than the erroneous handling as initially stated. The ONE primary shareholder in all three companies (50% in MFG S-Corp, 33% in Holdings C-Corp and unsure of the exact % in the IT C-Corp) made an equity withdrawal from his IT C-Corp INTENDING to finance the new Holdings C-Corp who would service the MFG S-Corp, but the CFO put the monies directly to the S-Corp, and primarily, paid expenses and purchased assets. Note that depreciation was NOT taken or expedited! The HOLDINGS company was designed to service the MFG company needs by renting equipment and purchasing/reselling productions materials, thereby letting the MFG company ONLY do that and all its procurement and services needs would be "outsourced" to the HOLDINGS company.Regretfully, I'm not as optimistic in your initial reply as we continue to clarifythe issue at hand. I would have to work with the accountant to identify the specific "assets" and "expenses," but asked you to share SAMPLE ACCOUNTING ENTRIES on how we would "sell" the assets/liabilities between companies, and in the case of expenses, what could be done there to move those expenses and liabilities to the company they belong?My accounting classes failed to prepare us for fixing such significant errors in booking to the wrong companies!
Financial Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 5 months ago

Dear Customer,

It is good that depreciation is not taken yet. That is the key.

Well, how it is affecting 2016 or 2017 if no one has taken a depreciation? There is no income/expenses. That is good. The correction will be on the balance sheet among three companies. That is where the inter-company sales, transfers, etc. can happen. We are trying to correct the balance sheet items.

Do you have the original journal entries for your reference?

Regards,

Fiona

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