S-Corp or C-Corp

[JAinNC]

Back to Same preparer doing buyer's and seller's returns

.... can sometimes result in a conflict of interest for the preparer.
In my office we handle bookkeeping and tax returns for a business that has changed hands 3 times in the past 20 years. To avoid setting costs for the advantage of the seller (who has been a client for more years), we make it clear that we must have an agreement from both sides with a sit down meeting to complete the info that will be needed later on forms 8594.

Jeannie

[Bees Knees]

I agree. It is a conflict of interest for one tax preparer to do both the seller’s and buyer’s return in the year of sale, even if the tax preparer did not sit in on the negotiations.

You will always have liability issues after the fact. For example, years later the buyer talks to a friend who questions why inventory and equipment was not higher and goodwill was not lower. Buyer forgets your tax explanation of the issue and never recalls you advising to go for higher numbers. The friend plants the idea in your client’s head that you did more to help the seller get capital gain treatment for selling goodwill rather than ordinary income on the sale of inventory and depreciation recapture.

If you get sued, an attorney will eat you alive at trial for playing both sides of the fence. I would stay away from this client as the collateral damage already done by the other tax preparer could come back to bite you. For example, your client might question why you never advised her of the issues involved between putting values on goodwill/equipment/inventory/etc. and the need to negotiate these things prior to the sale. Your client was never told by you that going to the seller’s preparer would be a conflict of interest and not helpful to her. You never warned her that the seller’s tax preparer could mislead her. The facts and the stories people tell have a tendency to change over time.

[geekgirldany]

I had one customer that sold his business this year and the buyer wanted me to help him with his side also. I told him he would have get another accountant to represent him during the sale. That it was a conflict of interest for me. But after the sale was complete I would help him with his bookkeeping, taxes, or any other services he may need.

Well I looked over the tax return some more and found several things.

1) The paid preparer is not filled out. The preparer did not sign the return and it was prepared with TT.

2) Inventory is listed on 4562 and deducted in one year.

3) Non Compete clause is deducted in one year.

4) No Goodwill

Everything else is the same. He went by my P&L. No adjustment to COGS. I am very concerned now. Especially since the preparer did not sign the return. I was told the preparer is retired from the state depart of rev and has been preparing returns for years. "He knows alot about taxes" as I was told by my customer.

I am going to call her about it. She can decide who to go with from there.

[Bees Knees]

3) Non Compete clause is deducted in one year.

4) No Goodwill

... I was told the preparer is retired from the state depart of rev and has been preparing returns for years. "He knows alot about taxes" as I was told by my customer.

He knows everything there is to know about taxes. Tell your customer she should stick with him, as you don't know how to make up tax rules like he does.

[geekgirldany]

Well I got back with the customer today. The person that prepared her taxes is not a professional preparer. Just does them on the "side" for people.

I discussed with the customer the problems I found and she said the "preparer" had not kept up with the tax laws. Didn't know why she dealt with him. She is still wanting to stay a C-Corp because he said that she can be paid fringe benefit for medical expenses. Customer has large medical bills this year and she wants the C-Corp to pay them for her as a fringe.

I looked in the taxbook and it appears in a C-Corp there would be no problem. But that the fringe benefit must not discriminate. So if she hires someone else she would have to offer this to them too.

I guess I will just have to ask how much was paid out for medical. If alot it might be an advantage. But her husband is covered by a plan at work and it has paid on the medical bills. Not sure there would be such a benefit in later years though.

[Matt Sova]

S-Corp

If this corporation grows significantly and they decide to sell at some point the double taxation on a C-Corp is HUGE. That is the main reason I like the S-Corp.

[geekgirldany]

I am glad you mentioned that Matt. This will be worth pointing out to the customer. I have always dealt with S-Corps and my knowledge on C-Corps is limited. I really don't think she will get a huge benefit from going with a C-Corp just because of the fringe benefits.

I recently had a local CPA close out a C-Corp for a customer who had passed away. I had him close it down because I was not sure if I could do it correctly. He told me that sometimes it is better to leave a C-Corp opened even if there is no activity because of the taxes. He mentioned something about taking the assets out and double taxation.