Sole prop and business building

[Margaret]

Sole prop and spouse bought building for her business, 100% use. Mortgage is for a bit more than spent on building and extensive remodeling. Sole prop should get depreciation and mortgage interest deduction, but how do I put the liability on the BS? Remaining cash is in personal account. Should it just be deposited into sole prop business account? Thanks!

[dsi]

Margaret,
Let's assume for the sake of illustration:
1. Bldg cost $100,000
2. Amount financed thru bank $100,000

How to book:
DR Fixed Asset-Bldg $100,000
CR Liability-Note Payable $100,000


This is the simplest way to record your transaction. It is now on your books.

As you make your monthly mortgage payments, part of it is for principle and part is for interest. The monthly entry could look something like this:

DR Interest expense $900
DRLiability-Note Payable $100
CR Cash $1,000

[OldJack]

How to book:
DR Fixed Asset-Bldg $100,000
CR Liability-Note Payable $100,000

As I read the question it was the excess funds not used to buy or improve the building that was the question. Since this is a sole-proprietorship the excess money in a "personal" account is immaterial as all accounts are really personal. It doesn't matter if the money is in the left pocket or the right pocket as the money accounts are not really important for tax purposes, in fact a business account is not even required.

I believe, that in this case the entry you were looking for was something like this:

How to book:
DR Fixed Asset-Bldg $100,000 (purchase + improvements)
DR Owner Draw $50,000 (equity account reduction of capital invested)
CR Liability-Note Payable $150,000

edit:
If you left the case in the business account (the one on the books) then your entry would just be:

How to book:
DR Fixed Asset-Bldg $100,000 (purchase + improvements)
DR Cash in Bank $50,000
CR Liability-Note Payable $150,000

The other issue:

There is of course the other issue of tracing the money for proper interest deduction on the loan. The additional funds must be used for business purposes if you want to take a full business deduction for the interest on the loan (1040 Sch-E). Again, it doesn't matter what bank account the money is in except that the money must be used for business as personal use would require a portion of the interest expense each year not deductible (see tracing rules in tax pubs).

[Margaret]

Thanks, dsi, for that very basic explanation. I actually knew that much. I taught accounting for a few years and have an MBA, but in Taxation. And I have been a CPA for over 20 years. But sometimes, one just gets fried brains especially after a few late nights finishing up W-2's and 1099's.

Old Jack had the right understanding. Thanks, Old Jack. I'm over 60 and qualify as old, too. In fact I did a dope slap when I saw that and called the client to see exactly where the money was. The "personal" account is just to hold the remaining balance until used to complete the remodeling. So I will add that account to her books and book all transactions. Yes, I know with a sole prop, everything is personal but all of this is entirely related to her insurance business and payments will come from her net profits.

I don't believe there is anyplace for a Sch E in this picture.

Thanks again for taking the time to read and respond. It is appreciated.

[OldJack]

You are most welcome Margaret. I try to answer any question with a very detail answer as I never know the background of the person asking. Also, it is so easy to misunderstand these things when it is just a brief reply like we do here and one wrong way of saying something can mean the opposite of intent. I guess my brain was not in gear when I said Sch-E. Glad you got everything straight with the client.