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We are being audited for 2014. I paid a credited card from

We are being audited for...
We are being audited for 2014. I paid a credited card from out daycare which which is considered schedule C for rental property officer remodeled and repairs schedule E. Since the IRS has that year open why cant the expense be used as an deduction instead of filing an amended tax return for 2014 after the audit?
JA: The Accountant will know how to help. Is there anything else important you think the Accountant should know?
Customer: It seems they want us to pay income tax on it???
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Answered in 5 minutes by:
10/30/2017
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 3,939
Experience: 3+ decades of varied tax industry exp. Tax Biz owner
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Hello. Thank you for choosing this Q&A service for assistance. My name is Angela. I will be assisting you.

My apologies....I do not understand what you mean by the following statement:

"I paid a credited card from out daycare which which is considered schedule C for rental property officer remodeled and repairs schedule E."

Are you saying that you paid a remodeling and repair expense using a credit card that is in the name of the DayCare? If not, please clarify.

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Customer reply replied 1 month ago
Ok through my daycare I paid a credit card from the checking account that was used for office warehouse rental building we own. $10000 the credit card charges for an office remodeled, the daycare is schedule C for expenses and the rental is a schedule e. It's is trying to remove the $10000 as an expense and place it as income. What is the best approach for the $10000 to be considers as an expense and not income?

Hello again. Let me see if I can understand this. The $10,000 from the checking account was used to remodel the warehouse office (Schedule E). So, the IRS is saying that the $10,000 should be income to which, the daycare or the rental? Where are you showing the $10,000 as the expense, on the Schedule C or Schedule E? I'm still not quite clear, so I am trying to figure it out based on the information that you provide to me. Thank you for your patience in helping me to understand what is happening here.

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Customer reply replied 1 month ago
I used a check from the daycare to pay a credit card we used for the rental property . All these business are llc .
Customer reply replied 1 month ago
let's say we skipped a step instead of writing a check to us personally then deposit the check in the rental llc checking account t and pay for the remodel material
Customer reply replied 1 month ago
On the rental property credit card. All these credit cards are in out personal names
Customer reply replied 1 month ago
Sorry auto correct
Customer reply replied 1 month ago
I paid directly out of the day care to a credit card for rental remodel material.
Customer reply replied 1 month ago
I did it by accident ,I thought since it all is pass through income and an expense is an expense but I guess not...

Ok, I see how the IRS thinks that it is income. The first mistake was mixing the activities of the businesses. That is a big no, no with the IRS, but I guess at this point, you are aware of that. I am still writing.

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What you need to do is to have a paper trail to show that the $10,000 deposit was a loan from the daycare center to pay for the remodeling. Your bank statements from the daycare center will show the $10,000 withdrawal. SEE BELOW:

------------------------------------

Bank deposits are one of the primary methods the government uses to calculate taxable income. As an indirect method, circumstantial means are utilized to approximate unreported taxable income. This method focuses on deposits made to a bank, or similar, account in a tax year.

Through this method, all deposits to an individual's bank and similar accounts in a single year are added to arrive at gross deposits. The government will attempt to identify non-taxable amounts, such as gifts, transfers of money between accounts, repayment of loans, and cash an individual had on hand for that year. When such non-taxable amounts are identified, if any, they are subtracted from the gross deposits figure, resulting in taxable bank deposits. Added to that figure are cash expenditures, not otherwise determined to be non-taxable, which is then deemed to be the gross income figure. The gross income is reduced by applicable deductions and exemptions. The resulting figure is determined to be "corrected taxable income." That figure is then compared to the taxable income reported by the individual on their tax return.

REFERENCE SOURCE:

https://www.browntax.com/Tax-Law-Library/Bank-Deposits-Method-of-Proving-Income.shtml

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Customer reply replied 1 month ago
I can not my mom lives with us and I have to keep attending to her.

You cannot what?

So, if you can show that $10,000 was withdrawn from the daycare center, and you can prove that the remodeling expense was $10,000, this should convince the IRS that the $10,000 was a transfer between accounts and not income to the rental proprty.

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Customer reply replied 1 month ago
I have proof of it all the payment where it went and the charges it went to pay.

My suggestion is to show the substantiating documents to the IRS with a letter of explanation indicating what transpired. While this matter should have been handled differently, (an officially loan agreement between the two businesses), presenting substantiating documentation of what transpired should convince the IRS that the $10,000 was not income.

If you do not require further assistance with this matter, I ask that you please take the time to scroll to the top of the page and select 3 or more stars to positively rate my response so that I can receive credit for assisting you. A 5 star rating is greatly appreciated.

Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
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Customer reply replied 1 month ago
I am waiting to hear from them for a meeting instead of fax, fax , fax. I just wanted to know what I could present to use it as an expense instead putting it as income to the daycare then amending the tax return. I feel since the 2014 tax is considered open why not deduct as an expense.
Customer reply replied 1 month ago
Ok thanks

Thank you for the positive rating. I appreciated it.

It is not an expense to the daycare because the $10,000 was used for the rental and not the daycare. If anything, the remodeling would be shown as an expense to the rental. From where I sit, I see it as a loan from the daycare to the rental and not as income to either the daycare of the rental because as the funds came from the account of the daycare, the funds has already been accounted for once by the daycare. You don't want to count those funds as income twice.

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