S Corp Riddle

[Luis Mopeo]

New entry on S corp balance sheet liability this year. "Line of Credit, $70,000." The offsetting entry appears to be a debit to owner's capital, which now has an approximate $70,000 negative balance.

I'm not seeing any purchases that would correspond to the $70,000 line of credit.

I have a call in to the accountant who did the books, but I'm really worried that somebody tried to get cute and thought it might be a good idea to run $70,000 cash credit card withdrawals through the corporation. Or maybe just plugged in numbers to make things balance. I'm afraid I'm seeing a $70,000 gain coming down the pike.

Any other ideas of why a line of credit liability would be applied to a capital account?

[lbbwest]

Stupidity

Perhaps the accountant considered the "Capital" a loan and paid it back with the credit line. (Not correct accounting or tax procedure.) I would definitely find out what's going on before I signed the return.

[OldJack]

There should never be a reason to make such an entry.

[BOB W]

Curious???

1- How much money was in the checking account at the end of the year?

2- Was there a profit?

3- What I have seen lately is the corporation borrowing money and lend it the officers.

[Snaggletooth]

Personal Loans

Mophead, I think when you get to the bottom of this, you will find this.

One of the differences between a 1065 and a 1120S - a partner's personal loan becomes part of his basis if the proceeds are used in the business for a 1065. For an 1120S, not the case. The loan has to be made to the corporation, even though the shareholders are almost always required to personally guarantee it.

I'll bet this whole mess is the result of someone attempting to transfer the liability from one of the partners to the corporation. Of course now the offset is in the shareholders' capital accounts so this sorta defeats the purpose.

Bad as hate to admit it, Old Jack is right. Entry should never have been made.

[Luis Mopeo]

Ah, yes. I finally tracked down the bookkeeper. The $70,000 is the shareholder's personal line of mortgage credit that he has been drawing on and sinking money into the business. Of course we all know that the purpose of the capital account is to enter debits and credits, whichever is appropriate, when you don't have any idea what you're doing and the computer program is demanding that you make a corresponding entry to make the books balance. That explains perfectly the corresponding $70,000 debit to shareholder capital.

I told the client that according to his books he has a $70,000 capital gain from distributions in excess of basis, and that showing his personal line of credit as a corporation liability was incorrect. He suggested this couldn't be, because his bookkeeper knew what she was doing. I gave the client a hearty "Hi-yo Silver, Away!!!!!!!!!," and sent him down the road with my best wishes.

[Snaggletooth]

Correct Entry

...as you have pointed out, the debit to equity was ridiculous.

If the $70,000 liability is allowed and real, the question should become,
"Where did the money go?" and then debit the account.

I hate to be such a skeptic, but I believe the bookkeeper knew better,
and was told not to charge the real expenditure because the owner
doesn't want disclosure. If the real expenditure was a personal item,
this becomes a disposition in excess of basis, and your suggested
treatment would be right anyway.

Sheesh - seems like there is no end to clients like this...

[Luis Mopeo]

Actually I've been watching this situation unfold for a number of years. The guy's a great plumber, but duh when it comes to books and records. He was a sole prop for many years, then found a "great" bookkeeper who convinced him to incorporate. I honestly don't think the bookkeeper knows better, and that's being nice. If she does know better, she's being intentionally dishonest.

Two years ago on his Schedule C she was insisting that he could take improvements to a building as a Section 179 expense. I told him no, I'm sure she told him I didn't know what I'm doing. Last year were more improvements. She told him three-year recovery. I told him 39. I'm sure she told him I don't know what I'm doing. Who would I believe if I didn't know taxes? I'd probably be like everybody else and be inclined to believe the person who was going to get me a big refund before I'd believe the person who said I was going to owe a bunch of money.

If you saw the bookkeeping fees, you'd see why the bookkeeper thinks there's a need for lots of song and dance in addition to screwing up the financial statements.

Alas, the client now has the opportunity to be successful with a different tax preparer.

[Snaggletooth]

The guy across town

Luis, I've seen this happen time and time again.

The sad fact is that the plumber will be able to find some incompetent,
erstwhile preparer who will buy into what he wants to do, and be jerked
around by the tandem of bookkeeper and client.

Like most of us on this board, I wish our industry could rid itself
of such preparers. They will file anything, do anything, report anything
for a fee. In my posts, I refer to such a preparer as "the guy across town."

[BOB W]

What ........

........ What should of been done, since it was a PERSONAL loan to the corporation, treat is as a loan from officer. But I'm still confused because if the money went into the corporation it must of been picked up as SALES???????

[outwest]

Hmmm.. if money was going into the corp..

from the shareholder, the first place it should land would be the bank account. Then of course spent for whatever corporate purpose needed.

Being of a questioning mind, I wonder if a bookkeeper could convince the owner of cash needs, get cash put into corp, divert the money to personal use, then obscure the tracks by debiting equity? That way, the clueless owner's accounts are the only ones affected. All he knows is that he loaned the company money and, yep, thar it is.

Even more suspicious minds would wonder if there might be other cash leaks going on...

Just because I'm paranoid doesn't mean they're not out to get me...