Property development as Sch C income

[manyhappyreturns]

A client of mine buys a piece of undeveloped property every year, builds a house on it, then sells the property for a profit the next year. He does some of the construction himself and hires contractors to do the rest. He is married with 2 kids, and the amount of money he makes buying, building on, and selling property puts him in the EIC income range. Because what he is doing seems like earned income to me, I don't see why it couldn't be considered a Schedule C business. He has been claiming EIC in the past, so the income has been being reported as earned income, but his former tax preparer moved out of state, and he can't find any of his previous tax returns, so I don't have a model to work from. If I report the gain from the sale of property on a 4797, it shows up as capital gains, not earned income, and therefore no EIC. I'm wondering how his former tax preparer got him EIC -- or if this is all a fabricated story. Sometimes it's hard to tell. Does anybody have any thoughts on this?

[RitaB]

Sounds like

Sounds like earned income to me. Betcha he is overstating expenses and/or pocketing cash. Does he have like a million business miles? It kinda sounds like the amount he is NOT making gets him a pile of EIC money.

OK, sorry, I have just about had it with EIC.

Yes, this is clearly Sch C.

And models from previous preparers are over-rated. You got this.

That said, a guy capable of building a house oughta be able to find his tax returns, Probably has depreciable equipment on em. Hold a carrot out there. He'll find the returns.

[Gary2]

If he can't find the returns, get transcripts from the IRS. You can even have him fill out the 4506-T to send the transcripts to you.

Has he filed the 1099s for the contractors?

[RitaB]

Nah

Has he filed the 1099s for the contractors?

If he's like the new contractors I get, he filled out the red copy and handed it to his guys. LOL.

[Lion]

If

If he's in the business of building houses, Schedule C, then the houses are inventory. No 4797 nor capital gain. And, most expenses are COGS and not deducted until house is sold.

[manyhappyreturns]

Thank you so much everybody for your responses! I, too, am a bit fed up with EIC claims. It's not near as bad as it was back in the days when I worked for H&R Block, though. Sheesh! I was amazed at the stories I heard then, such as people "renting" their children to friends and relatives. I didn't even think to ask my client if he 1099'd his contractors. Very good point. I had started the return calling the properties inventory, then putting the expenses for labor and supplies, etc., but the part that hung me up was that the property he sold in 2011 was reported on a 1099-S. That made me think I'd better put it on a 4797 so the IRS would see that it was indeed reported and not send my client a letter 5 years from now telling him he owes capital gains on it plus penalties and interest. I can show no gain only if I include as expenses the amount he paid himself for the construction, so maybe that's exactly what I need to do. Then I suppose he will need to 1099 himself????

[RitaB]

1099-S / Personal Draws

but the part that hung me up was that the property he sold in 2011 was reported on a 1099-S... I can show no gain only if I include as expenses the amount he paid himself for the construction, so maybe that's exactly what I need to do. Then I suppose he will need to 1099 himself????

The 1099-S is no problem. IRS knows it might be on Sch C. They will find it.

OK, you are kidding about him deducting his own draws, cause he then has to report them as income on another (or the same) Sch C.

[Burke]

Thank you so much everybody for your responses! I, too, am a bit fed up with EIC claims. It's not near as bad as it was back in the days when I worked for H&R Block, though. Sheesh! I was amazed at the stories I heard then, such as people "renting" their children to friends and relatives. I didn't even think to ask my client if he 1099'd his contractors. Very good point. I had started the return calling the properties inventory, then putting the expenses for labor and supplies, etc., but the part that hung me up was that the property he sold in 2011 was reported on a 1099-S. That made me think I'd better put it on a 4797 so the IRS would see that it was indeed reported and not send my client a letter 5 years from now telling him he owes capital gains on it plus penalties and interest. I can show no gain only if I include as expenses the amount he paid himself for the construction, so maybe that's exactly what I need to do. Then I suppose he will need to 1099 himself????

Lion has it right. It does not go on 4797, even if he did get a 1099-S. It is included in Sche C gross income. I don't think you can 1099 yourself. You can't even pay yourself for labor. The net from Sche C will either be a gain or loss depending on the expenses.

[manyhappyreturns]

Okay, thanks. Are you sure the figure from the 1099-S won't come back on my client later on down the road? It was for $148,000, so it better not.

And yeah, I was kidding about him 1099-ing himself. I suppose I should have followed that comment up with the proverbial "lol."

[RitaB]

Yes

Okay, thanks. Are you sure the figure from the 1099-S won't come back on my client later on down the road? It was for $148,000, so it better not.

And yeah, I was kidding about him 1099-ing himself. I suppose I should have followed that comment up with the proverbial "lol."

Yes, I have a builder who has had as many as three 1099-S's a year, Sch C, no problem, that's where it goes. They know realtors sell spec houses.

Am I sure IRS won't miss it? Well, no, but it's easy to explain.

People miss my jokes, too. I hate to put "LOL" cause it takes away from the cleverness of it all. Many happy returns to you, too.

[Gary2]

It's not near as bad as it was back in the days when I worked for H&R Block, though. ... I didn't even think to ask my client if he 1099'd his contractors. Very good point.

I'll glad provide my HRB Business Card.