Tax liability on repair credits?? - Posted by John

Posted by Paul S on February 17, 2002 at 14:44:29:

Make it a loan and you’ll have no problem. If you charge, in effect, yourself for repairs- you pay your company for repairs that money becomes income for the company. Seems to me like there is absolutely no reason to do this. You need to see an attorney, however in my own non-expert, non-legal, and non-anything else that could in any way construe that I would have any liability whatsoever for this advice, opinion: Arrange your affairs so as to legally minimize your tax burden. I don’t see why a loan- other than interest- paid back to your company could in any way be taxable seeing that it would be made (the loan) with the company’s after-tax income/profits. Check with a pro.

Tax liability on repair credits?? - Posted by John

Posted by John on February 17, 2002 at 14:15:07:

I am wondering about the tax liability on repair credits.

Any thoughts would be appreciated.

Specifically, if you own a construction company (specifically an S-Corp)and borrow $10,000 from that company as a downpayment or money needed to close a deal, and then that company gets $10,000 from the seller’s proceeds to perform repairs to the property after it has closed, does that company have to pay tax on that $10,000 or is it a net of $0 on the books? Consider that the company will not get the $10,000 back from me for a very long, long, time, at least not on “this” years tax return.

I guess it depends on whether a “loan” from a company is considered a disbursement for that company. If it is than it is a nobrainer, i.e. the net gain on the books would be $0. If it isn’t, can a claim be made that the construction company was simply repaid the $10,000 through closing and that the work will be performed at no cost or is this considered laundering. It seems absurd to me that I put my own money into a deal and then my company receives that money back and then I have to pay some large chunk of it to taxes. Any way around this? I have done a couple of deals where I borrowed the money from the construction company and had the construction company paid through sellers proceeds for repairs to be done on the property. There has to be a way to not pay taxes on money that was originally yours but I don’t want any trouble with tax fraud.

Re: Tax liability on repair credits?? - Posted by Dave T

Posted by Dave T on February 18, 2002 at 10:54:00:

Separate the two transactions, and pretend they are arms length. If you did not own the company, you would have borrowed the purchase funds from some lender that would expect repayment. If you did not own the property, the company would expect to be paid for rehab services performed.

First, you received money from the company for personal use. Either that money is taken as a loan that should be repaid, or that money is a withdrawal from owner’s equity. Ask your accountant how to treat that money for the best tax outcome, and document it accordingly.

Second, it appears that you hired your company to perform rehab services for which the company was paid from the proceeds at settlement. This money is income to the company for services performed.

One problem I see with claiming that your company performed rehab work at no cost, is that you can not then turn around and add the rehab costs to your basis in the property. Keeping the transaction at arms length overcomes this.

I suspect that the bottom line is that the $10000 for rehab work is income to the company, which you then withdrew as owner’s equity for personal use. Somewhere in all of this, your company should show $10000 as income for services performed, while you have a (tax free perhaps) withdrawal of owner’s equity.

Just my humble opinion. I am not a tax professional and do not pretend to be a corporate accountant. Please consult your accountant for specific details.