Builder - Interest Income

[retailguy]

Well here's one I have not seen before.

New client - he's a (now) semi-retired builder. Sold about 20 properties in the past five years on private contracts. He receives 1099-Int's from the bank or brokerage house handling the contracts on behalf of the seller and buyer.

His past 3 years returns the EA preparing the returns has treated said income as schedule C income, instead of interest income. Considering he has had losses the past three years in his business it makes no difference on the return whether he claimed the income on line 8 or line 12, I just want to know what is right?

From my perspective, he is a builder, not a bank. Although he is acting in the capacity of the bank, he is not in business to loan money, but he loaned money to support his builder business.

It seems incorrect to me to put him in a position to pay social security taxes on interest income, which will happen in about 2 years when his depreciation of his existing equipment runs out.

He is still building one or two houses a year, but not enough business to justify new equipment and has no plans to replace anything.

Well, experts, whats right? I can't find a definitive answer... and I've looked in my tax book which I like very much by the way....

retailguy (who is hopelessly swamped with 19 days to go....)

[Bird Legs]

Building & selling homes

This appears to be a business. Sched. C. Is client building speculative homes?
Even if client is slowing down it would still be sched. C.
Let us suppose you want to cut back on tax preparation from 500 returns a year to 200 returns a year. Would not these fees still go on Sched. C?
Now, interest income. Nowhere on Sched. C do I see a place to put interest income.
The only thing I can think of is where is client making money? From interest or from
building and selling homes?

[Matt Sova]

Business he is in

This person is not a bank. He is not in the business of loaning money. His business is building spec houses and selling them that is what gets reported on Schedule C. The interest from land contract's go to Schedule B.

Although prior years are incorrect and my mind is foggy right now, I do not see any reason to amend since the Schedule C has losses on it, as stated in original post. Put the interest on Schedule B where it belongs.

[Brian EA]

This person is not a bank. He is not in the business of loaning money. His business is building spec houses and selling them that is what gets reported on Schedule C. The interest from land contract's go to Schedule B.

Although prior years are incorrect and my mind is foggy right now, I do not see any reason to amend since the Schedule C has losses on it, as stated in original post. Put the interest on Schedule B where it belongs.

Matt is correct. Put interest on Sch B where it rightly belongs. Maybe the original preparer put it on Sch C (as other income which is incorrect) to save the client paying taxes.