How do I treat this entity?

[joanmcq]

In 2013 client sets up S-corp for his real estate biz (no he did NOT discuss this with me first!), and then in 2014 husband decides to quit his job and open a coffee shop.  Everything for the coffee shop is run through the S-corp. 

client owns corp 100%.  Coffee shop is split 50/50 between client & spouse. My first thought was s-corp owns a partnership. Can't have unequal distributions, and RE biz is just client's. There might be an issue with licensing too as far as non RE person owning corp that sells real estate. I don't know, I'm frazzled and just can't wrap my mind around it. And, of course, he never got me the stuff for 2014, so that return is really, really late. 

Maybe corp can be 75% client, 25% spouse?  Anyone have any ideas how I deal with this?

[BHoffman]

Morning!  When you say everything concerning the coffee shop is run thru the SCorp, does that mean the legal stuff like loans, leases, contracts, and payroll, etc?  

Because I would want to separate out the coffee shop activities from the real estate business and report the coffee shop separately on a 1065.  2014 is already late and this is a ripping mess.

An SCorp can be a partner, but a partnership cannot be an SCorp shareholder.  

[Lee B]

I think the key issues revolve around how the coffee shop was started up.

Did the funds come from or thru the S Corp or ?

Did they use the S Corp checking account or set up the checking account under the S Corp name with a dba or ?

You need to answer these key questions before you ask the how to questions.

In this case the substance of how they did what they did really matters.

[Lion EA]

Extensions.  Although, 2014 and the S-corp 2015 are already late.  So, deal with this after you've had some R&R and don't have a deadline hanging over your head.  Make them provide all organizational paperwork, put their partnership or whatever agreements on paper, etc.  (If they spend or spent money on a lawyer, you fees will look really cheap!)

[joanmcq]

I did extend the 2015 corp. yay.....

I know they ran the income and expenses through the corp.  But just talked to client and spouse still is working at W2 job - maybe keep him out of it.and then spin shop off into new corp in 2016.  treat spouse hours as volunteer?  Dunno at this point.

This is a client with crappy organizational skills but a deep appreciation of what I do and pays my fee happily and gratefully.

[Max W]

Isn't an S-corp with husband and wife, MFJ, considered as 50/50 by the IRS? 

Frank;y, I would pull out all of the coffee shop items and put them on a Sch C. and prep the S-corp as a final return, especially if it is on CA.

[joanmcq]

S-corp predates marriage although they were RDP before they got married.

Client is looking at whether mixing real estate and coffee shop could run afoul of the licensing for RE if it is co-owned.  Attribution is different than actually owning the shares.

Anyways, I think we are going to treat it as 100% client and then spin off the coffee shop in 2016 to its own corp.  But we can't pull out the coffee shop from the corp; all income and payroll is under S-corp EIN.