Partner Buyout and Balance Sheets

[Alex]

First "HELP" post here!

I 'inherited' a client this year. They're brothers - partners in a partnership that took the S-election for 2016. Don't know how to phrase the question yet, so I might ramble a bit...

In 2015, they were filing as a partnership with a 60/40 split. The business had around 360k in gross receipts. There's no Schedule L on the 2015 return (and no Schedule L on 2014 and 2013 either. Business consistently grosses over 250k). Their previous accountant only ever asked for income and expenses, and they always gave it to him in an Excel spreadsheet.

In 2016, they filed as an S-corp. Over 500k in gross receipts. No Schedule L. One K-1 issued to Mr. 40. None for Mr. 60. Apparently, Mr. 40 bought out Mr. 60, but I do not find a record of this on the 2016 individual return. I find 12K in proceeds on Mr. 60's 2017 Sch D (he already filed his 2017 return btw). Shouldn't that have been reported on Mr. 60's 2016 Sch D? He should still have received a K-1 in 2016 if the buy-out was in 2017, right? 

I have the 2017 worksheet and have managed to get a P&L from them, but they've been dragging their feet on the balance sheet - not because they don't want to give it to me, but more because they have no idea what it is or how to get it or why I'm even asking for it. Gross receipts for this year according to the P&L are again over 500k, however, their spreadsheet shows a little over 400k. 

So the steps I'm taking would be, assuming that the buy-out happened in 2017: 

1.I would need to amend the 2016 S-corp return so Mr. 60 can get his K1 for that year

2. Which would mean amending the brothers' individual returns

If buy out happened in 2016:

1. I would only need to amend Mr. 60s 2017 return.

Still waiting on client's answer as to when it happened. I do see some notes with question marks in their files. My interpretation is Mr. 40 would pay out Mr. 60 in installments of 1k a month for 5 years for a total buyout of 60k. How would that be reported on Mr. 60s individual return if that's the case? 

Will deal with how to fix the balance sheet after I figure this whole buyout thing. I don't even know where to start.

 

[Catherine]

1 hour ago, Alex said:

I don't even know where to start.

You actually seem to have made a good start already.  I might recommend that you keep a bottle of your favorite tipple at hand while working on this one.

If they kept Excel records, ask for those at least.  Bank statements (they have a separate bank account, I hope!) for the years in question.  Maybe back to the beginning.  

Mr 60 needs his K-1 and amended return for 2016 regardless of when the buyout happened.  Mr 40's might be OK for 2016, unless he ended up taking 100%.

 

ONLY do this one on a retainer basis.  It is a royal mess, and you need to be paid to fix it.  If they won't do a retainer basis, give it all back now.  In addition to the headaches, you are putting your professional reputation on the line by presenting returns completed on incorrect and insufficient prior data.  Never worth it.

[Abby Normal]

Tell them you need everything entered in QuickBooks with bank statements reconciled from the beginning... or they can go somewhere else. And that you'd be happy to enter it all for them a $5,000 retainer.

How can a company with mid 6 figure sales not have any books! The IRS would slaughter them on an audit.

[Alex]

Thanks, @Catherine and @Abby Normal! I was having nightmares about it last night.

Their mom does the books on Quickbooks online.  I don't think any of the accounts were reconciled from the day they started. I just spoke to her and requested access. Company's initial filing was 2011. I'm also not sure if they've ever filed a sales tax return. It's an e-commerce business.  I'm afraid to ask. 

 

[Alex]

1 hour ago, Catherine said:

Mr 40's might be OK for 2016, unless he ended up taking 100%.

And yes - he ended up taking 100%.

[grandmabee]

Also the scary part of this is you have no time to finish this by 09/17/18 ( or at least I wouldn't),  so late penalty will be 195. per month. BUT if they have never been late before then I always been lucky getting a penalty waived. You can back into  the balance sheet but the books would have to be clean and it doesn't seem like that is the case. Good luck.

[Catherine]

For these folks, I would NOT recommend "filing *something*" just to get it done by 9/17 with the intent to amend later.  Once the pressure (of monthly penalties) is off, you won't see them again until 9/1/2019.

[Alex]

Whew! At least the client is willing to do things the right way. Better to pay the late penalties now than risk being sitting ducks in the event of an audit. Talked to them last night and they agreed to work on their books. 

Thanks for lending an ear (or an eye? eyes? this being a forum and all?  ). The day's certainly better because of you people.