Bookkeeping problems

[geekgirldany]

This is a new client. I did their S-Corp tax return last year but this is my first year doing their bookkeeping. Same client from the Day labor question.

They are coming up with a loss but the owner is paying himself a check every week to every two weeks. I just don't know where the money is coming from. I'm sitting here right now trying to figure this out. Should I not take into account the amount of depreciation on equipment?

I'm just don't see where the money is coming from. I'm trying to figure out how much of the withdrawls to do as payroll. I'm thinking all because there are no retained earnings from 2004. None coming up it looks like for this year either.

Add to that they paid out $6,000 to repay themselves for buying a truck through their personal home equity line. They became a S-Corp in 2004. Didn't tell me their was a loan on this truck, it was paid off. Well yes it was but the shareholder had a loan on it. I need to figure out what to do with it.

This might not make sense I'm about pooped out! Thanks to them for just bringing it this week. Not two weeks ago. That really bothers me (rant end)

[Unregistered]

Is it possible that there are cash receipts that are being posted to a liability account rather than income? That would produce a humongous loss with relatively little income.

Regarding the truck- I suggest you do some more research. Theoretically the truck SHOULD HAVE been paid for directly by the corporation and the loan payable from the bank come from the bank to the shareholder to the corporation - but apparently it didn't happen that way. You need to see the bill of sale and insurance policy.
I suggest you determine how the truck is registered and insured. It SHOULD be in the corporation's name, and insured as a commercial vehicle. If so, then the total truck cost is a fixed asset, with the offset to an officer loan payable-since the loan was made to the shareholder not the corporation, less the $ 6,000 paid by the shareholder. If the truck is not in the corporate name, then it's a personal vehicle, and the $ 6,000 is a distribution, and the only deduction that can be taken is the standard cents per mile - otherwise the shareholder has a taxable fringe benefit for the use of a corporate asset.

[BOB W]

Bookkeeping..........

One of the first rules that I require of all my clients is that all expenses must be paid from directly from corporate funds, in otherwords very little petty cash type expenses.

Are all their expenses coming from corporate accounts?

[JG EA]

In my opinion

If their salaries would not be considered reasonable on the job market, It is a good thing when the S-Corp makes very little profit, or a little loss provided the money they are taking is from payroll. How could it ever be questioned to be reasonable wages if they are paying themselves all of the company profits?

But to track the money, do a cash flow statement so you can see at a glance from where the money is coming and to whom it is going.

Depreciation can be "added back" to see the real profit.

Perhaps there are loans on the books to keep the company going. I spent years with an S-Corp that caused me endless sleepless nights. I wish now I never took it on. What I have learned is outline what is important (tax wise) to me, write it down and refer to it. Put it in a letter to the client. Although I may say that they'll sign whatever you write down, so it doesn't solve the problem of a careless client. Then if the client doen't adhere to those rules, I send him to someone smarter, or at least more nonchalant.

Thankfully after many years of tax preparation I can just say that 'I've found this type of return takes me more hours than I have the time for or that I can bill for and therefore unprofitable'.

If you want them as a client, set groundrules.

[Armando Beaujolais]

There's nothing inherently wrong with shareholders taking distributions, as long as all the shareholders have identical rights to distributions. And you don't have to have a profit. But the money does have to come from somewhere. If the corporation doesn't have profits, you don't have to pay a wage.

What seems troubling isn't the process, it's that the money seems to be coming out of the blue.

Was the S corporation operating for a while before you took them on? Consider this. The client is taking big expenses for "day labor." Also taking funds out of the S corporation bank account. You can't find where this money came from. The guy is not operating according to the rules, and there are signs that could indicate some shady things going on.

What happened to the client's last accountant? You might want to consider that someone before you went through exactly the same thing you're going through now, and eventually, for whatever reason, decided it wasn't worth it. If there was a prior accountant, you can bet that person tried and tried and tried to get the client to report things properly, and by the looks of things, failed miserably.

I'd also go the route of demanding a cash flow statement. But there won't be one.

I recently had a situation that was similar. A guy with a little restaurant dumped his stuff on my desk one day. Losses, losses, losses. I did it for a couple of years, then called the guy to ask about where the money came from. He said his parents were loaning him money. They were my clients too, and they did have big second mortages, and they said he was bleeding them dry. The story sounded feasible, but I said I needed documentation to verify that they'd loaned him over $200,000 over the past few years. They stuttered and stammered, and they both got letters shortly thereafter saying "I will no longer be able to perform any work for you folks. Sincerely."

A month later I got a call from a mortgage broker where the guy was trying to get another loan. The mortgage guy had questions about the payroll. The numbers just didn't seem right - payroll looked like he might have had one or two part-timers. About this time I was feeling pretty smart for letting the guy go - I'd be feeling really sheepish if the guy was still my client. The mortgage guy said "I go there to eat. He has at least 15 people on his staff."

Does your client have brown hair and a little twitch in his left eye?

[geekgirldany]

Thank you all for your posts.

I asked the client to bring some of Oct check stubs. I found a deposit made at the end of September that I did not have entered. It was not on the bank reconcilation statement or the check stubs I have. So that has made up for alot of what was missing.

I also did a statement of cash flows. I remeber now that the shareholder gave the corp. a personal loan of $15,000. This was taken out of a personal credit card. The client is paying himself back every month for it to go towards his personal credit card for this amount. All of these have been posted according to the Loan from shareholder of $15,000.

He does have enough to pay himself if I don't count depreciation. If I put it back in he is definately over. I think the money to pay himself is basically coming from that $15,000 loan. Instead of using the loan money for only business expenses he has been using it to pay himself a check also. As JG and Armando mentioned.

This doesn't make sense though that he would do this. Look like he would know that he is paying himself back for the loan. So now they are low are money because he just took it back out.

I'm counting this quarters withdrawl as payroll. Since he did have the profit to pay himself I think it should be considered payroll. I will have to discuss with them what is left should be put towards the loan from shareholder.

Their previous accountant left the state. This client is the brother of another client that also came to me because this accountant picked up and left. They were previously a sole prop. They turned into a S-Corp in Jan 2004. The accountant had done the bookkeeping up til the 2nd qtr 2004 and left. So I'm really starting off fresh with them. I found alot of mistakes that the previous accountant made. Umm, like telling them an S-Corp was a way for them not to pay self employment tax. I then had to explain it wasn't. She had also done a business in home deduction for a S-Corp.... I mean did it like you would do it on a Sch C. Amazing!

On the truck loan. Well the truck was being used in the business before incorporation. I asked the client if this truck had a loan on it. They said no. So when I did their 2004 tax return I took this into account when doing the Section 351 transfer of assets. I treated the asset as though it had no loan. Then in 2005 they write themselves a check for $6000 saying this is what they had took out of their personal equity line loan to pay off the truck loan in a previous year. Now I can see how they would not think the truck had no loan on it. It didn't from the bank. But the owner/shareholder had loaned the company money. So the truck did have a loan on it. It really messes everything up as regard to shareholder basis. I'm going to count it as a shareholder's distribution. Its the only thing I think can be done.