Business beginning a bit sloppy

[Margaret CPA in OH]

Longtime client had bright idea that his wife and her mother (in another state) would form an LLC to flip properties.  Client is good with remodeling so did most of the work and will receive 1099.

 

However, property was purchased in the name of the wife, insurance was purchased in wife's name before date of filing with state or even property purchase, utilities are in the name of client and wife, not LLC, all materials to rehab are in personal credit card.  At least some outside contractor receipts are billed to LLC but I think not paid out of LLC funds.

 

Before I ask, I think mother in law came up with the money, wife is more or less figure head and client is the worker bee with the ideas.  And this doesn't even get to the Repair and Cap regs yet!  Before I would lump all together to place in service but now am not so sure.  Oh, and it hasn't sold since completion a couple of months ago so now they are thinking of renting it out.

 

Can I just quit now?

[kcjenkins]

Just a BIT sloppy?  Sorry, could not resist.

 

Does the LLC have a bank account?  Any money in it?  His 1099 should be on a C, of course, and the materials can be deducted there, so that part is workable.  But clearly, you need to educate them on the 'entity' concept.  Hope your fee is going to reflect the extra work they've created.

[Abby Normal]

Ignore LLC until title is transferred. Sounds like no income or expenses in  2014 anyway. Elect to capitalize carrying costs and put the expenses to startup costs asset. No depreciation or amortization until 2015. They can transfer it all to the LLC in 2015.

[Margaret CPA in OH]

Thanks, KC and jmdaviscpa.  My inclination is to, indeed, ignore the LLC until the title is transferred although I will surely hear about it.  But how can I capitalize costs (which I would normally have done if the costs were not (except for the few invoices) charged to the LLC?  Maybe it should all be to the wife (probably her credit card anyway).  But the other invoices are for labor such as drywall repair, etc.  Hard to capitalize that for something that isn't even in the LLC yet.

 

I do have the question out as to whether a bank account exists and how the money traveled to the property seller and the client and others for payments.  (I do know the client, of course, receives a 1099 and it goes on Schedule C.  I think he may be surprised that the truck will, too.)  As this is inventory (unless/until it's rented, there should be no depreciation on anything, I think (except his truck on Sch. C).

 

When I see the funds flow, I think all the property except maybe the truck is put into the LLC as capital contribution from wife.  I also have to see whose credit card paid for other stuff....

 

And then there was the foreclosure of one of their rental properties early last year.  Sigh... At least when I did the review of the other rental properties, and I did look carefully at all, I see no issues regarding the repair and cap regs.  Just an election going forward. I have another client that will be a real challenge - in case this one isn't enough!

 

Last year for these folks - they are super nice and have the cutest kids ever but always a challenge.  Time to cut bait.

[Richcpaman]

Why was that sloppy?

 

You have one partner (mom) putting in dollars.  Her capital.

 

You have another partner (Wife) putting in some $$, not much, but some (via Credit Card)

 

You have the final partner, (Client) who did the work, and got paid for some of it.  (no cash, but maybe some)

 

They built up the inventory, per JMDavis, so there is no deduction/income in 2014 but the balance sheet and partner accounts can be determined. 

 

And it is not unusual for the insurance and utility companies to put the invoices in the wrong name.

 

Rich

[Margaret CPA in OH]

Rich, I don't yet know exactly the source of the funds, how much from whom.  I don't yet know whose credit card it is. 

 

The client is NOT a partner, his decision, his choice, hence the payment of $2300 as 'general contractor.' I suspect it has something to with the foreclosure of a rental property last year in his name.  It's possible there was a thought that it might 'tarnish' further transactions but I don't know that for fact.

 

In my opinion, why go to all the trouble to create the LLC then not title the house, truck, utilities, etc, in that name and treat it like a business from the beginning?  I don't think the utility companies put the accounts in the wrong name,  I don't think they even knew there was an LLC involved.

 

To me, until the property is titled as XXX LLC, it isn't LLC property nor is the truck.  As of now, I think there are only organizational costs that properly belong to the LLC, but I want to see the cash flow.  The bank statements would be nice or clear documentation as to who paid how much for what.  For some reason they have answered questions about their personal returns but not about the LLC as yet.  I especially want to see the payments made to the contractors.

[Margaret CPA in OH]

Okay, I finally have all the information and have input. Loss is the $125 to state for organization. Mother contributed $17,800, wife contributed $5000. I added up all the expenses paid for the property purchase and remodeling and considered that as cash distributions to the wife. When the property is titled to the LLC, it will be her property contribution.

It turns out the client was paid for contracting remodeling and purchased the truck for himself from that fee. Whew! Because the cash was, I believe, a distribution to the wife, I am not going to issue a 1099 from the LLC. Or from wife as it wasn't technically yet a business expense. I think.

My issue now is that the capital accounts don't show on the K-1's and, with the wife's excess withdrawal of cash, the capital is depleted, why wouldn't that be possibly taxable income to her? Her capital account summary (worksheet, not on K-1) shows negative $18,000. Is this a problem?

I am not a fan of partnerships. Think I will get out the business next year as I did for corps a couple of years ago.

Thanks for comments!