jainen

>>Would he be eligible for a Social Security Number?<< No, and most likely not a green card either. Immigration is a whole different thing. As an employer you might be able to sponsor him for a work visa if his field is in demand. I don't know whether nationality is a part of it, but he would probably at least have to go back to South Africa and re-enter with the work visa. If he works with club members or clients on club facilities, you should look VERY carefully before paying someone as an independent contractor. And in any case I would certainly not permit anyone to provide business services on club property without general liability and a workers comp policy in your file. You also need a tax ID number for any independent contractor because you have to issue a 1099-Misc. Yeah, I know what everyone there says. "We've always done it this way and never had any problem." Well, welcome to the 21st century.

>>He is a Tennis Pro<< Sports, umm. Well, what would be your plan if an off-the-books guy should claim he was hurt on the job? Of course he needs permission to work, and you have to set up withholding and workers comp and the whole shebang.

>>losing this kind of money and then getting taxed on it is a big pill to swallow<< Oh no, I won't go with you that far, Linda. He knew perfectly well that he was employing extreme leverage. But instead of accepting the implications of that risk like a decent investor, he's just walking away from it. We're not talking hard luck here. He has "a lot of personal wealth" to honor his obligations in full, but from day one he never paid a dime on that loan. You say he just "forgot about it." Yeah, sure, he forgot that he gave his kid a half million dollar condo with a fat monthly allowance! LOSING money? That's a laugh--he is GAINING $315,000 in net worth out of this one transaction. Not too shabby for a two bit investment in the worst real estate market around. That's right -- 25 is all this big gambler ever put on the table. So let him pony up his fair share of taxes like all us other slobs. Then the government can bail out the banks he stiffed.

>>the $465,000 would be ordinary income<< That's what it looks like. For a recourse loan, the amount realized from sale is the lower of debt or FMV. So Schedule D will show basis of $640K plus expenses, proceeds of $150K, and -0- in column (f). Line 21 on the 1040 will show the amount of debt relief. There is still hope, however, in the calculation of insolvency.

>>Great reply<< Thank you. As a dedicated contrarian, I always try to present the inverse position. Around here, that usually means being negative. I'm not exactly sure this one shows the bright side, but it's about as close as I can get on this continually optimistic forum.

>>probably is, a recourse loan?<< Read the papers! All I know is that if I were lending money in second position (second, as in zero security unless there's something left over) I would sure want the borrower to be good for it. So, yeah, I guess she owes an extra $40,000 state and federal, with penalty for not making estimated payments, plus her own itemized deductions are wiped out by AMT. I wonder what she'll buy her homeless son for a Christmas present.

>>Isn't the purchase of residential property usually non recourse debt?<< In my state (California) a purchase loan for a PRIMARY residence is generally non-recourse. For other mortgages, the lender may have an option to foreclose on the deed of trust (non-recourse) or the promissory note (recourse, through a judicial proceeding). I don't know the law in Nevada, where property is often bought as a second home or investment. Like as not, your client's purchase was mischaracterized as owner-occupied, so just read through the whole loan package and see what it says. Frankly, I'm not positive that for taxes a short sale is treated the same as a foreclosure anyway. But I think so.

>>this exclusion is that if it was her primary residence<< Dale's reference apparently concerns the reduction of tax attributes (such as depreciable basis). Income from cancellation of debt is a different matter. Don't accept the 1099-C at face value--banks send them routinely out of nastiness or stupidity. READ the loan docs to see if it was in fact a recourse loan. A lot of times the only reason they'll agree to the short sale is because they can't otherwise get any money at all from the borrower. In your state (California) purchase of a primary residence is always non-recourse, and dollars to donuts that 2005 purchase was written up as owner-occupied. Read the loan docs.

>>$100,000 down too<< Down payment is irrelevant. His basis is purchase price plus transaction costs, including fees related to the sale. I'm guessing that it was a non-recourse loan, so the amount realized on sale would equal the debt canceled. If it was a recourse loan, the amount realized would be the lower FMV (presumably the sale price). Use those numbers and override column (f). There is ordinary income from cancellation of debt ONLY if it was a recourse loan. The bank might send a 1099-C anyway, so READ the loan docs and keep a copy in your file.

>>What form do we use?<< According to the Instructions to Schedule D, "if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, you must report the transaction on Schedule D even though the loss is not deductible.... enter -0- in column (f)." There can be no question this property was held for personal use, as the residence of the owner's son. Presumably the son was reporting rental income, but that is nothing to the owner.

>>I can't believe a real tax professional would actually use the screen name you are posting on<< I think it's highly appropriate for a tax professional. It's an anagram for "She lies joyously."

>>if I simply treat it as investment property she will have a loss on the sale<< Not on my desk. That was personal use by a close family member. I'll bet you can't find a single document to support investment status--certainly all the loan papers say otherwise. It was nice of her to try to help her son that way, and if he can't repay the entire debt maybe he can at least cover the tax effect.

>>since Turbo-Tax and Quickbooks are both Intuit products, the transfer should be seamless<< Unfortunately, being seamless is the problem. It makes it harder to verify and make adjustments. Quickbooks is not a tax program. For example, if the partnership is a retail store or a manufacturer, QB probably does not track inventory costs in the best way for tax purposes. But the number will transfer right into the tax form and look just fine. Same with depreciation--the tax code does not follow Generally Accepted Accounting Principles, and state tax returns may offer or require other cost recovery choices. For example, I don't think you would enter bonus depreciation in QB. Section 179 deductions probably shouldn't go against book depreciation, but in any case must flow through the 1065 to be taken on the individual returns. Overall, you may not want MACRS in QB because it misrepresents the actual life of assets, cash flow, and P&L. The government sets depreciation policy as an incentive to investment in tangible assets. The business may well have opposite needs. Partner contributions and distributions are almost certainly going to be problematic. What do they mean for business operations, and what for tax liability? There are various elections and decisions to be made on the books and separately on the tax return. So your goal of "100% correct when transfering into the tax return" is unrealistic. It's not just a question of what is "correct." Quickbooks and Turbotax record and manipulate data in different ways for different purposes.

>>Are you speaking with the authority of an Attorney, or just retaliatory rhetoric? << I would guess it's rhetoric, STMan. He's trying to dramatize the implications of the question you keep avoiding. Obviously he is not rendering a legal opinion because he doesn't have the necessary facts to do so. That's the whole point. What do you expect us to make of your original post, which says "Residence owned by S-Corp" in the heading but says "the LLC (owner of the real estate)" in the text? Then you say there's no mortgage but the loan is secured just like a mortgage. You ask us how to handle it -- well, I suggest you start by clarifying whether your new client is the corporation or the shareholders. Or both, if you can resolve the conflict of interest. Anyway, the best way to handle it depends on which side you are on. And the second thing I suggest is that you explain to us why the previous tax preparer quit. And that ain't just rhetoric.

>>The "loan" is a "Commercial Loan" with land, buildings, business (goodwill) and contents (at purchase date) -- all specified in the purchase<< Please clarify whether the real estate was acquired with the proceeds of the commercial loan at the same time as the business, or was previously owned and just used as additional collateral.

>>There is no single answer that fits all cases<< No, but there is an extremely common answer, which is that homes owned or paid through a business entity are taxable compensation. This answer fits a very wide spectrum of business activity, but especially pass-throughs and LLCs. Even with the most generous terms of clergy rules, you can't automatically assume that the fringe benefit is non-taxable. Maybe the property was held free and clear in the name of the sole proprietor LLC, and just added as security to a business loan since the business was going to be relocated onto that property. That's not how I read the original post, but it's as good a guess as any.

>>The commercial loan appears to just have personal assets for security<< I don't completely understand how the purchase was set up, but the bottom line is that the cost of personal housing is being paid with corporate funds. The corporation does not own the property, so some kind of accounting is needed for the payment. Depending on the details, the two ideas in original post (rent or W-2) are probably the most reasonable choices. If treated as rent from the corporate employer, expenses would not be allowed. Throwing an LLC into the mix is the current favorite scheme to hide the fact that personal expenses are being deducted from business income. When you remember that the IRS disregards the LLC, what this taxpayer (and his lawyer) are trying to pull off becomes clearer. Speaking of lawyers, won't a plaintiff's attorney have fun with this, should a liability claim arise?

>>Extremely<< Just like April 15.

>>we wants a to file as a 1120S<< IRS is tolerant of late elections if it's just a paperwork problem and the corporation and shareholders treated it like an S-corp all along. The absolutely most important question is whether you are making a retroactive decision in light of more recent facts. If for example you expected several years of corporate losses but once the books were closed it turned out to be a big gain so now you want to avoid double taxation, that won't work. It's nice to demonstrate that the original plan was based on S status and the company has been operating accordingly. By demonstrate, of course I mean document.

>>a loan through the government<< Why did your clients not qualify? If it is because they have poor credit or a weak business plan, they need to fix those problems first. If it is because their idea is very original and market research is inconclusive, they will have to find unusual financing. The Small Business Administration guarantees loans, not makes them. Other agencies also guarantee loans, including Fannie Mae and Freddie Mac, but all with pretty standard underwriting. Presumably if the banks saw any hope of qualifying they would have already made the referral, because that's what they do. Although not nearly as common as it used to be, don't overlook redevelopment agencies, arts councils, and other local governments for startup money. They may take a closer look at non-financial aspects of the project. For really oddball ideas the best hope would be private money from family and friends, venture capitalists, pawn shops, etc.

>>I agree with John<< So do I; it was my advice to do first. I rate it unlikely in this particular case, however, because the Notice of Deficiency means a final determination has already been made. It is possible to get that set aside, but the IRS prefers to follow the normal path to Appeals. They are in a stronger position if they do nothing until the court orders the review. But understand that doing nothing is not the same as saying nothing. Oh, they'll talk to you all right--ask you to fax stuff and file a return and everything. But meanwhile your 90 days may run out and that's almost impossible to fix. If IRS won't pull the 90-day letter after your first contact, file the court petition and wait for Appeals to call. I recommend you refer this to an Enrolled Agent, but you will probably win anyway (assuming you can support your client's story).

>>I can't do anything to help<< You are an experienced tax professional, but are simply not eligible to practice before the IRS in a situation like this. The best you can do is help him find someone qualified, perhaps with a fee-sharing arrangement. Go ahead and ask your questions, then call around. If he still has most of his ninety days left, you might first try to contact the IRS with your client on an extension phone. The chance of success is better than zero but still not very good. Your client has already ignored many IRS contacts. The normal procedure at this point is to file a petition with Tax Court, which will be referred back to IRS Appeals for settlement. They aren't going to spend much time with someone who is "absolutely no good with paperwork or figures" and doesn't even have someone who can speak on his behalf.

>>they are up to date now<< When you don't actually have reasonable cause, abject apology can be surprisingly effective. The key supporting arguments are a)they had a really good record of paying ALL taxes on time, b)this was an isolated problem that arose during an unusual time of transition, c)they did not benefit from the non-payment or pay other bills instead, d)they have made SPECIFIC changes in their procedures to ensure it won't ever happen again, e)they have a really good record of timely payments under their new procedures so far. In such a context, the IRS will agree the penalty has already served its purpose in ensuring compliance.

>>Federal agriculture authorities have declared disaster areas<< Don't click that link until you've had your morning coffee. It's a cold list of the destruction of so many people's families. For tax purposes, does it count as a presidential disaster declaration if it comes from "agriculture authorities"?

>>This makes the cost of the land and cost to develop and build a capitalizable cost<< Land and development costs must ALWAYS be capitalized. If and when the rental is placed in service, depreciation can be started. Otherwise the cost will be recoverable when sold. Don't know what the issues were, but no casualty loss for needing more development. It's not sudden or unexpected or unusual. Somebody just wasn't following the rules. By the way, I don't believe your client was actually told what he claims, at least not by any reliable source. He probably didn't ask the right question. For example, if he said, "I lost all this money trying to develop the land," well, sure, a LOSS would be deductible in 2006. But in tax lingo he didn't actually lose anything, he just spent it. And even though it's costing a whole lot more than he originally expected, he still has the capital asset that he spent it on.