Discussion:Deduction of Expenses - Related Corporations
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Discussion Forum Index --> Tax Questions --> Deduction of Expenses - Related Corporations
| 5 September 2008 | |
| My client owns 2 S Corporations. They are not related in business whatsoever. In order to provide funding and be able to pay expenses for Newco established in 2007, OldCo took out credit lines and that money was spent on Newco expenses. on the Oldco books, the debits were always recorded as A/R from Newco (with credits going to the respective credit line accounts.) On the Newco book, looks like the expenses were always booked to the actual expense account, i.e. legal, bank fees, etc., and the credit was booked as an A/P to the Oldco.
Oldco has not been paid back by Newco for these expenses that have been booked in Newco's books. Taxpayer is cash basis, although I'm not sure that matters, but I think that these expenses would not be deductible to Newco, as Newco has never paid for them. The expenses were paid by Oldco which took out the credit lines in the first place. (but the expenses are booked to A/R Newco so Oldco also does not get a deduction for these expenses. What do you think? Do you agree with me? | |
RoyDaleOne (talk|edits) said: | 5 September 2008 |
| Accounts receivables, generally ar from sales by a entity, the account should by called by another name in my opinion.
The IRS could ceeate a dividend to the shareholder of Oldco and a capital contribution or loan to Newco. Oldco loan could be reclassified as due from shareholder. Newco loan could be reclassify as due to shareholder. | |
| 5 September 2008 | |
| I am not the bookkeeper -- I agree that the terms used on the financial statements could be, and probably should be, different.
I am wondering about the deductibility of the expenses by Newco as asked above. | |
RoyDaleOne (talk|edits) said: | 5 September 2008 |
| I gave you two ways it could be deductible.
Newco can and should use the deductions, your question does not contain enough facts to be totally sure. | |
RoyDaleOne (talk|edits) said: | 5 September 2008 |
| With your education and experience I have a hard believing you do not know the answers to this question. | |
| September 5, 2008 | |
| Are there plans for Newco to pay the inter-company debt? What happened to Newco -- bad business plan? Does your client own 100% of both corps? | |
| 5 September 2008 | |
| Of course, ideally, Newco would pay the debt -- this will be possible if the business is sold and there is currently a LOI in the works. But without a sale and/or a miracle, it looks bad. Bad business plan coupled with the fact that the owner does not have the time to put into the company to make it fly. Yes, client owns both Corps. | |
| September 6, 2008 | |
| Well then, I like Roy's second suggestion above. Or what about foregiveness of debt income on Newco's books and bad debt on Oldco's? (Note a prior boss did this -- I'm not sure if there are any special rules with respect to deducting bad debt from a related entity.)
Any course of action will require proper documentation in minutes of both corporations. | |
RoyDaleOne (talk|edits) said: | 6 September 2008 |
| Sell the assets of Newco. Merge the two corporations. | |
WIBadgerCPA (talk|edits) said: | 8 September 2008 |
| The expenses are paid, so I would take the deduction. I would treat it like a credit card or note payable. Even though your cash basis, the expense has been paid, so pick it up. | |
| 8 September 2008 | |
| I like the idea of merging the 2 companies -- not sure why they were separate in the 1st place as it was not my suggestion. Now it seems that one company will be sold anyway.
I picked the expenses up as paid. No revenue in Newco in Year 1 so I treated them all as start-up expenses, limited to the $5K deduction, which was then further limited by basis. Thanks for the input. | |
