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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I began questioning my ex partners corporate Profit and Loss

Resolved Question:

I began questioning my ex partners corporate Profit and Loss statements he prepared and I believe it tax evasion. Under expenses he is claiming approx $9000.00 a year in lost vendor discounts. The company buys paper as a broker from a paper mill and ship purchased paper to our customer. We buy the paper at 10,000 and resell at 11,000 a profit of 1000. The company we purchase the paper offers a 2% discount if we pay in 10 days (standard in paper industry) my partner claims $200.00 loss because he didnt pay in 10 days and considers it an expense on the profit and loss statement. This further reduces the profit in the company and the discount offered was never realized it was a discount offered for a quick payment. Can this really be a ligitimate business expense, Is this a way my ex partner avoids paying taxes to the IRS and reduces to the companys shareholders on K-1's?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
Hello crl,

The deduction of a "lost discount" is not a legitimate deduction.

The only deduction you are allowed to claim on the cost of your products is the actual cost that you paid, whether that be the full price or the discounted price. In fact, if you had paid the invoice within the allowed time limit and taken the discount, you would have still booked the actual inventory cost at the full price, and then you would show the purchase discount taken as income. But you certainly do not book the full price of the product and also the lost purchase discount as an expense.

If the IRS were ever to audit the returns of the business, those deductions would be disallowed, as they are not an actual expense that the business incurred.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you crl.
Customer: replied 7 years ago.
Merlo can you please elaborate. Is taking a lost vendor discount as an expense in any tax books as a way of further supporting your answer
Expert:  Merlo replied 7 years ago.
Hello again crl,

I am not sure what I can elaborate on, other than you are not allowed to deduct an expense which you actually did not incur.

In other words, just because the invoice was not paid in time to take advantage of the discount that was being offered does not mean that you actually incurred an additional expense. It just means that you you were not able to take advantage of a discount that was offered to you. It's almost the same thing as booking a higher price that you paid for paper because you happened to purchase it one week after a sale had ended. You can't book the difference as an expense.

Let's say that the paper you purchased cost $500, and they were offering you a $20 discount if you paid the invoice in 10 days. If you had paid the invoice in 10 days, then you would have sent the vendor a check for $480. You would have then booked the $500 as an expense for the cost of the paper, and then booked the $20 as income from the purchase discount. Purchase discounts are treated as income accounts for accounting purposes. So your total out of pocket expense would have ended up netting out at $480.

When you missed the deadline date to take the discount you simply still have the $500 cost of the paper, but you have no income to book from the purchase discount, because you were not able to take the discount and you paid the full $500. But now if you come along and book the missed discount as an additional expense, in effect you are saying that the paper cost you $520, which it did not.

Not taking a purchase discount does not increase your cost of the product. You still paid no more for the product than if the vendor had not offered the discount in the first place. The price of the paper was never $520, and you did not pay $520. You only paid $500, and that is the only expense you can book.

I hope this helps explain it, but let me know if you have more questions.

Merlo and 2 other Tax Specialists are ready to help you
Customer: replied 7 years ago.
Merlo Thank how you Can I contact you regarding accounting and futher services, My name isXXXXX email [email protected]
Expert:  Merlo replied 7 years ago.
Hello Ray,

Unfortunately, the JA website will not allow us to exchange personal info such as phone numbers or email addresses with the customers. In fact when you try to give me a phone # XXXXX email, it shows up as XXX-XXX-XXX

But you can always come back and contact me through this forum. When you post a question in the tax forum you have the option of requesting a specific person, and I am in the forum nearly every day. So I will be happy to help you with anything that I can.

Thank you Ray.

Customer: replied 7 years ago.
Do you have experience with Pension plans and a partner having to infuse at end of year a salary in order to participate, and if a partner can charge 24% interest on A/R Loans, if so Im sending next question, also can I send 6 pages to you to review on pension plan
Customer: replied 7 years ago.
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Customer: replied 7 years ago.
Merlo I have accepted thank you can I print your answer having trouble printing
Expert:  Merlo replied 7 years ago.
Hello again Ray,

If there is something you want me to review on a pension plan, you can upload the file to a site such as mediafire and then send me the link where I can access the file.

As far as 24% interest charged on loans, are you talking about loans the partnership made to one of the partners or just what are the details of who made the loan and who it was given to?

I am actually going to be leaving the forum here in the next few minutes, but I will be back here tomorrow morning. So if you want to post a new question with a link to the retirement document and let me know your questions on that and on the loans, I can take a look at this tomorrow morning for you.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you Ray, and I will look tomorrow to see if I can help you.
Expert:  Merlo replied 7 years ago.
Hi Ray,

Sometimes the pages will not print. But I have found the way around that is to highlight the whole page by dragging your mouse over it, and then select "print selection".