Sales Tax Deduction

[geekgirldany]

Customer is a builder. He is going to retire but before he does he is doing one final house for some prior buyers.

He states that he did not take out the loan for building the house. His customer did. So the loan is in his customer's name. Now customer takes draws from the bank and he deposits in his account. He then goes and buys all materials for the house.

Well his customer went to have her taxes prepared this year. Her tax preparer said that the materials he buys... she can deduct the sales tax on her Schedule A.

I dont' think she can because he is buying the materials and the money she draws is like an income for him. In which he uses this money to buy the materials. What do you guys think?

Hope this makes sense just finished moving furinture in my office

[Lion]

Pay it to Deduct it

Yep, you have to pay the expense to be able to deduct it. Your clients are buying a house. The contractor is buying the building supplies. If it's still ongoing, maybe they could structure it differently from now on -- have your clients pay directly for the qualifying supplies or have their credit card on account at the building supply place or have the vendors invoice your clients or....

[BOB W]

Contract wording.......

....should state that the contractor is acting as the Agent for the buyer. This allows the deduction of sales tax paid by the contractor on the buyers tax return....

[geekgirldany]

Yeah I told him that she should have opened an account under her name. Then he could go and get the materials and her pay.

Bob that is a excellent idea on him acting as an agent! The money he receives fromt he draws could be listed as a Asset... like another bank account maybe. Then all supplies he buys comes out of that. There is no income, no expense. I'll have to asking him how he is handling what profit he will make on it. Plus what the current contract states. There maybe a way to amend it.

Thanks guys!

[BOB W]

I read........

.......... somewhere, maybe TTB, that this as an allowable method for deducting sales tax when using a contractor. In this case there would be no need to have a separate account to pay for the materials. All that is needed is the amount of sales tax paid from the agent's ( contractor's) records.

[BOB W]

I found it.......

..... in the instructions for 1040 schedule A, page A-5 middle column. Is where it talks about Contractor/Agent clause in the contract.

[geekgirldany]

Wow Bob thanks so much I will take a look at that tomorrow.

I think my customer's biggest concern is that he would be deducting the expense and she would too. Which he is correct. But as long as he doesn't report the draws as income and doesn't report the expenses I think it will all work out. I was thinking of another account besides income and expenses in QBs. That is what he uses.

[Unregistered]

The answer to your question depends on state law. The Supreme Court has held the sales tax deduction goes to the ultimate consumer. But state law would generally treat the builder as the ultimate consumer. In the original post its clear there is a BUILDER. In NY, where Bob W. is, the law would not allow a builder to charge sales tax, nor to consider it as a separate cost to the buyer. It would be a part of his/her COGS.

[BOB W]

Charging Sales Tax....

... is not the issue here. Capital Improvements are not subject to Sales Tax, but Sales Tax must be paid on the materials used in a Capital Improvement. That is the area we are talking about. In otherwords, labor is not subject to sales tax.

The only adjustment necessary is the cost basis of the home must be reduced by the sales tax deduction taken.

[geekgirldany]

I found the page that Bob was talking about about. It says "under your state law, your contractor is considered your agent in construction of the home....". It then goes on to explain about the contract. The builder doesn't charge an additional sales tax as Bob stated.

[BOB W]

I'm lost....

I can't find where I said the builder charges additional sales tax?????? When the builder buys materials the sales tax is included in his total purchase price. That sales tax, if the contract states the builder is acting as the homeowner's agent when he buys the materials, is an allowed sales tax deduction on schedule A, if it is greater than the state income tax deduction.

That is all I have ever professed from the beginning...........

The Guest that jumped in made a comment about the builder charging sales tax, not me.

[geekgirldany]

I apologize Bob. What I was saying was in response to Unregistered. I was agreeing with you that the labor is not subject to additional sales tax.

EDIT: Customer came in....

I was agreeing with you and appreciate your help on the matter. I called the customer and he said to print out the page you suggested and he will give it to his client. Thank you again.

[BOB W]

To guest....

..... I agree with you IF the builder was Spot Building without a known Buyer. Then the sales tax stays with the builder as a COGS. In this case, there is a buyer before the construction starts and the builder is constructing the buyers choice of home, putting it in the same catagory as a home improvement. Having a contract allowing the builder to act as an agent of the buyer would work for sales tax purposes.

Back to the issue of double deducting the sales tax (COGS or 1040 A sales tax deduction), one of them would have to give up that portion of each's computation. I guess preferably all material costs would come off of the builder's income/expense and the job would be billed as labor only, including markup for material handling.