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jamesray50
01-17-2012, 03:37 PM
I met with a couple today who have owned a construction company for over 6 years. They are a S-Corp. Their office is in their home. They just finished building a shop on the back of the property for business use only. They just purchased a vehicle in personal name but want to use for company use only. Their balance sheet shows only one asset - bank account, liabilities accounts are the payroll liabilities, and the equity accounts are paid in equity and retained earnings. They said their CPA said they show should as little as possible on their balance sheet so they wouldn't lose anything. Their paid in capital is $1,000.

1. Their CPA said they could deduct 10% for home office expense. Where did he come up with the 10%?
2. What can they do about the shop they built? Any way to take a tax advantage for the business?
3. What about the vehicle? What is the best thing to do about it. And they plan on purchasing more.

TIA

vangogh
01-18-2012, 12:55 PM
I'm definitely not the person to answer, but I didn't want your post to fall away from the new post list so answer I will.

I'm not sure how this works in an S-Corp. or any other corporation. As a sole proprietor you can deduct a percentage of certain home expenses based on the percentage of space used in your home exclusively as an office. To make the numbers easy say your home is 1000 sq ft and you have a room inside used exclusively as an office that's 100 sq ft. Doing the math the office is 10% of your home and so 10% of things like the energy bill can be deducted. I'm not sure if it's the same for a corporation though. I wouldn't think it would be the same, but again this isn't my area of expertise.

I'm guessing the shop would work in a similar way since it's they that own it personally and not the corporation. Again with the sole proprietor a car can be deducted in a couple of ways based on business use as a percentage of total use.

David and Evan will know more about this, but my understanding is once you take things to any corporate level it's important to keep the personal and business separate. The personal assets are getting protected because they aren't connected to the corporation. I would think that also means the corporation can't get tax breaks for those personal assets.

I may be thinking of a different kind of corporation though. Once again know I'm mainly responding so your post doesn't get lost before those that can provide you a better answer have a chance to see it.

jamesray50
01-18-2012, 01:14 PM
Thanks for answering. I was hoping Evan would see this. I do books, but I don't do taxes so I don't like to answer them unless I know for sure what I am talking about. And of course with corporations it makes it more confusing for me. That is the one thing I miss about the CPA firm I worked at. There was always a CPA available for questions.

vangogh
01-18-2012, 06:09 PM
Glad to answer. If we chat back and forth a few times I'm sure this thread will be visible enough when Evan signs back in. I can usually answer the sole proprietor stuff since I've done that enough for myself, but I can't claim to know a lot about how corporations handle taxes.

jamesray50
01-18-2012, 08:09 PM
I posted the question to my bookkeeping chat room and a couple of tax people did answer, but I didn't really understand what they were saying, and one of them will post the links to the IRS codes. And who understands those? I also contacted by email a local CPA I use to work with who is a FB friend. We had discussed last year about working together, so maybe she will contact me.

Someone on the list mentioned a "Gift Leaseback" for the vehicle. I googled that and don't understand how that would benefit a S-Corp. I am so glad I don't do taxes! Too much stuff to keep up with.

vangogh
01-19-2012, 01:53 AM
I hear you about the tax codes. I have to admit I did get pretty good at figuring out the forms I have to fill out each year, but there are parts that always confuse me. What bugs me the most is that the ones that are hard to understand seem to be the ones with no instructions. I don't get why a few questions here and there don't have instructions included. Why leave out a few answers. The instructions for filling out your address are included, but not some of the more confusing items. That makes no sense to me.

rshughes
01-19-2012, 08:58 PM
They said their CPA said they show should as little as possible on their balance sheet so they wouldn't lose anything.
....
2. What can they do about the shop they built? Any way to take a tax advantage for the business?

I'm not a tax accountant either, but I've experienced similar issues in my own S-corp. What I think the CPA means is that the new shop should be titled under their personal names and not the corp. They then rent the shop to the corporation for a set monthly rate, which the corporation gets to deduct as an expense. The rent "paid" to the couple is declared as schedule C income and they'll pay taxes on that. It all comes out even in the wash, but doing it this way, assets that are not in the corporate name are protected from any corporate liabilities. It also makes title issues unambiguous, should they decide to sell the property (house + shop) in the future.



3. What about the vehicle? What is the best thing to do about it. And they plan on purchasing more.
TIA
Maybe the same strategy should apply to vehicles. But in my situation, I didn't do it this way -- my corporation bought the vehicle, makes the monthly payments, and takes the depreciation deduction (as equipment). Corporation also pays for all gasoline and maintenance, taking the deduction for those expenses. Since I use the vehicle for personal use also, I declare a portion of these expenses as personal income (i.e., I maintain a mileage log from which we derive the % of personal use). The CPA should be advising them of the pros and cons of doing it this way, or he may advise to lease the vehicle as it seems cleaner.

vangogh
01-19-2012, 11:59 PM
That makes sense about the shop. I can see how it works that way. Under that situation where the corporation is renting it from the personal ownership do you have to claim the rent as income on your personal taxes? I would think so, but I'm admittedly guessing a bit here about corporate taxes.

The vehicle works similarly for a sole proprietor in the sense that one way to deduct it's use is to keep a mileage log and figure the % use for personal and business. I had started to do that my first year in business, but I really don't use my truck for work enough to justify spending the time recording mileage.

jamesray50
01-20-2012, 01:23 AM
I talked to a local CPA today and she said it was best to calculate the square footage of the shop and office and take that percentage of use as the business expense, but not as a monthly expense, which is what the current CPA is having them do. It should only be done when the taxes are done at the end of the year. And for the vehicle, keep a track of the business miles and have the corporation reimburse the owner for the business miles. Now, whether they should buy the new vehicles in the company names or personal names is a matter of preference. If they put them in the company name, then they can take depreciation, but then they also have to keep track of personal use and add that to wages. The IRS really looks for stuff like that.

I tried calling the person I met with, but he didn't call me back today. I hope I can get hold of him tomorrow. I really would like to get the account.

Evan
01-20-2012, 10:32 PM
Sorry I've been a bit hammered this time (as you can imagine).


I met with a couple today who have owned a construction company for over 6 years. They are a S-Corp. Their office is in their home. They just finished building a shop on the back of the property for business use only. They just purchased a vehicle in personal name but want to use for company use only. Their balance sheet shows only one asset - bank account, liabilities accounts are the payroll liabilities, and the equity accounts are paid in equity and retained earnings. They said their CPA said they show should as little as possible on their balance sheet so they wouldn't lose anything. Their paid in capital is $1,000.

1. Their CPA said they could deduct 10% for home office expense. Where did he come up with the 10%?
2. What can they do about the shop they built? Any way to take a tax advantage for the business?
3. What about the vehicle? What is the best thing to do about it. And they plan on purchasing more.

TIA

I agree that as "little" as possible should be on the balance sheet, but that's an accountant speaking too. If the corporation is inadequately capitalized, it's also possible that the corporate veil could be pierced in the event of a lawsuit. I'm not saying they need to keep millions in reserves, but this should be realistic.

1. I'm not sure how 10% was calculated. It should be based on square footage. In general, I do believe it would be reasonable to set up a form similar to the "Business Use of Home" schedule, and allocate any "general" items that are household and business related and use that percentage. This way you can have a rent expense for X% of utilities, taxes, etc. Keep in mind, if you take something that is deductible elsewhere, you need to reduce that amount on their personal return. (If you use 10% of their $15K mortgage interest, you need to subtract that 10% from what you're claiming on their Schedule A). If they are not seeking reimbursement from the company for this amount (which would NOT include depreciation), they could file the Business Use of Home form as part of their Schedule A unreimbursed business expenses with the 2% AGI haircut. For that though, you'd want to include depreciation, and you're also now making the home subject to capital gains when it is sold. Claim no depreciation -- it'll STILL be subject to capital gains, as the law says "allowed or allowable". Not claiming it doesn't mean that it won't be subject to capital gains. Though to try to legitimize this, the Corporation should establish a REIMBURSEMENT plan with the shareholders a percentage of actual business expenses paid. Then based on this spreadsheet, determine the "annual" rent, and make sure this gets paid out. This is essentially an accountable reimbursement plan. If one is not in place, you will likely be denied a deduction on an IRS audit.

2. To the extent that they can, they should monitor their expenses and see what their utilities, taxes, etc. increase as a result of this addition. I'd follow the advice given above. I would NOT place this into service of the business, as you're subjecting it to capital gains tax when they sell the house. Plus you do not want an asset that potentially appreciates in an S-Corp.

3. If they're for use in the business, they should be in the name of the business. This exposes them to personal liability if the truck is in an accident and I find out it's registered to "James Doe" and not "Doe Construction Co.", as if I was going to sue I'd try to go after Doe and the company. But to the extent they're OK with that, they can be reimbursed for business mileage. Though if a business has a number of vehicles, it's going to be required to use actual costs after 5 vehicles and they have a "fleet".

jamesray50
01-21-2012, 12:01 AM
Evan, now you really have me confused. I spoke to a local CPA and she said they could claim a percentage of the home as a home office deduction. I thought I understood what she was saying at the time, but now am unsure. Are you saying the corporation pays rent to the owner for the percentage? If so, is it taxable to the owner? I don't do taxes, I am a sole proprietor (I know, not a good idea), and I work from home, but I don't even do my own taxes. I'm one of these people that if I don't know how to do something I won't do it. So, I don't know what is on a Form 1120-S and how they would calculate the office rent expense. Especially since the office is in their home.

And I think their balance sheet looks weird without any assets other than cash. No WIP, or AR or inventory, savings account, etc. They have been in business for over 7 years.

Evan
01-23-2012, 10:54 PM
You do not want to do the home office deduction via Schedule A. That certainly IS possible. But you can set up an accountable reimbursement plan with the corporation and shareholder to reimburse for a percentage of utilities, mortgage interest, etc., similar to what you claim via the home office deduction. You'd claim this as a "rent expense" for the S-Corp, but would need a spreadsheet the calculate this amount, and that's what you'd insert into the return.

In the above arrangement, I wouldn't claim income on a Schedule E, as you're claiming reimbursement for expenses.

jamesray50
01-24-2012, 12:12 PM
Thanks Evan, I think I understand now.