who pays for what, does it matter?

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#1
juro  
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My client owns several related entities that all own real estate.
One entity, the parent, is purchasing everything for another subsidiary entity, and it all will be capitalized as improvements on the books of the subsidiary entity.

The sub entity getting all the free improvements has no money or activity of its own, so all vendor bills have the name of the parent entity on them.

Usually i setup is an intercompany account between the two, showing the sub owes the parent,
but client does not want it, as he has too many of these already, as the bank will complain about it,
so it appears there is no relation between the two entities on the books.

Will there be a problem in case of an audit? Will the sub be allowed to book all these improvements ?
Last edited by juro on 9-Apr-2022 12:47pm, edited 1 time in total.
 

#2
sjrcpa  
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What types of entities are they?
What types of tax returns are filed?
 

#3
juro  
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sjrcpa wrote:What types of entities are they?
What types of tax returns are filed?



all subs are LLCs & reported on clients schedule E.
The parent is a S-corp.
 

#4
sjrcpa  
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If Sub S owns the LLCs (you said parent), why are the LLCs' activities on 1040 Schedule E?
 

#5
juro  
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What I meant was, the parent does not own the subsidiary, but they are all owned by the same individual.
 

#6
eze  
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There is nothing wrong with the S-corp coordinating and paying the bills as long as it is accounted for and you have all your source documents.

Have you considered just crediting member capital on the LLC.....and then the S-corp would be distribution (debit) to the owner. This would be messy for audit, but as long as the business purpose made sense it should be OK. Also, under audit you are inviting the government to branch out to other entities because of the way the money moved around.

I have this situation...where S-Corp is a licensed contractor....they coordinate and pay the bills for the owner's properties sometimes.

The other thing you can do is wipe off the intercompanies occasionally....owner has to fund it, but you have all the entities make payments to clear off all the old intercompanies to keep the intercompany balances to a minimum. Bankers and auditors will drive you nuts with intercompany questions....so I understand the owners complaint.
 


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