Single Owner S Corp

[erchess]

I have wrapped up three returns for this entity and I have a concern. The entity put all income into its bank and paid all expenses by writing checks on the account. There were no checks written that appeared to me to be other than for legit business expenses. For two of the three years I am showing profit approximately equal to end of year bank balance but for the first year I am showing profit way more. Can this be right?

[BHoffman]

"How can I owe taxes? I don't have any money!"

Sure. Happens all the time. Two major reasons:

1. The owners took draws.

2. The Company paid a lot of debt principal.

Both of these things will decrease cash but will not affect income because they are not deductible.

[erchess]

But in my case

the owner took no draws and the one debt payment was to pay off the corporate credit card in full.

Can anyone else provide other ideas? I am thinking that I must have failed to credit him with an expense but I have been over my work and been unable to find that expense. Remember that every income item was a deposit to the account and every expense item was a check drawn on that account..

[DonPriebe]

Can anyone else provide other ideas? Remember that every income item was a deposit to the account and every expense item was a check drawn on that account..

Let's try the basics -- with your assumptions ...
All income is deposited into the bank account
All expenses are withdrawn from the bank account
There are no capital transactions

The year end balance should NOT equal the profit unless the balance at the start of the year was zero.

[BHoffman]

erchess - Do you by chance have a balance sheet for the company?

From what you are saying, the only thing on it should be Cash and Equity.

Does the company have any fixed assets? Does it hold any inventory?


I'm assuming you reconciled the bank account(s).

[Gretel]

How are the books done? If it is QB you might want to check if the file is corrupted and/or if the balance sheet in QB actually balances.

[JohnH]

If the client is using QB, you might also want to verify that the reports are being run on the correct basis (cash or accrual). Another place to look would be to verify that there is nothing sitting in "Undeposited Funds".

[S T]

Qb

Yes good advice,

QB if your client is using, the cash or accrual could mess you up big time on your reports

Regardless of the size of the Business- well recommended advice is to always run a balance sheet, and as pointed out in many previous posts , without it you really don't know if you have true income reporting or not without a balance sheet.

Even though I don't have to complete a balance sheet for my Sched C clients form 1040 - I always review- and usually I find something amiss that amounts to additional income or sometimes a deduction.

Good Luck,

Sandy

[erchess]

Further Information

1. Right now the company is not making or intending to make a profit but eventually he hopes to build it to the point it does generate a profit. That's why it is an S Corp and not a nonprofit. Of course it would have made sense to set up a charity for this phase of things and an S Corp when planning indicated that the next year might yield a profit that he would like to spend. He was advised and assisted for free by a lawyer who sells real estate and practices real estate law and was willing to help him for free because the lawyer's kid plays soccer.

2. As I said, all of the income is fees paid by parents so their kids can play soccer. All of the expenses were for things he needed in order to let the kids play soccer. We are talking soccer balls, rental of practice and home game playing facilities, uniforms, fees to enter tournaments, fees to pay referees, etc. There are absolutely no fixed assets. There are no "books" of any kind. Books will start to exist now at least if he wants my help in the future. We are still talking about what the future will look like for his business.

[S T]

Based on Original Post

Erchess -

Take a look at the bank statements when the S Corp was first set up

How much money did the Shareholder open the Bank Account with?
Of the money that the Shareholder opened the Bank Account - how much was the Shareholder's money and how much was deposits from the "fees" from parents.

Another thought - how much of the deposits would be from a "sponsor" or some other person that wanted to contribute to the Soccer Team as a donation that might not have been sourced directly to an expenditure.

I am thinking that you have to have some sort of simple accounting method to reconcile deposits and checks written either for expenditures or other purposes.

A suggestion would be do do a reconciliation of the Bank Statements(bank deposits and cancelled checks) to try to source the discrepancy. I think John H can shed some light on that endeavor.


Sandy

[erchess]

It has been represented to me repeatedly

and in writing that all of the money for deposits into the account came from parents who were paying for their children to play soccer.

I don't think this client has the necessary understanding of how accounting works to form the intent to cheat on his taxes. Like all of us he doesn't want to pay more than he owes but he doesn't seem to mind paying whatever I tell him he owes. He even understands that because he let things go for several years he will have to pay more than the sum of the payments he could have made in timely fashion. He's very good at coaching soccer and he's very good at making money but he seems to have no ability to keep track of it all.

[S T]

S Corp

You say, this is an S Corp
First Year - Isn't there a contribution to S Corp Stock? The shareholder basis plus any additional paid in capital contributions?

Sandy

[erchess]

I don't think so

This would be my second NC client who was allowed to create an NC S Corp without contributing any capital as such. This guy got people to pay him fees for their kids to play soccer and my other S Corp set things up and personally paid for expenses of the S Corp. In the latter case I started tracking his (and the other owners') basis but as near as I can tell if the client we are discussing here were to sell the corp he would have no basis because he steadfastly denies having put in any of his own money.

[BHoffman]

Erchess - I have been thinking about this:

I believe the only way you are going to have resolution is to reconcile the bank accounts, whether through Quickbooks or the old fashioned way.

[Burke]

Me too. I have taken client's bank statements/registers and plugged in all the numbers to QB and it will tell the story. I did an entire year in about 2-3 hrs. If he cannot document what each of the deposits are, it will all be construed as income by an auditor. He's got to have a checkbook register at the very least.