[Bourne]

Hello All,

Kind of a unique situation – I have a client that owns a rental property in his own name. They’ve had this rental property for a while and they just created an LLC in April 2018 to act as the property manager. As such, this client would like the LLC to now recognize the income and expenses related to managing the property (the rental income and managing of the property are all now recorded on the books of the LLC). This LLC has 5 members.

The client is recommending that I record income and expenses on the books of the LLC before the company was even created. Example – income and expenses flowing through the owners personal account from January 2018 – April 2018. The business was created in April 2018. The client would like for me to record the items that passed through the personal account, before the entity was created, on to the books of the company and show these items as being reimbursable from the company back to the owner of the real estate.

My thought: the company cannot claim income and expenses in this situation before the company was even created. This client also has another CPA that completes his taxes and the CPA is making a statement that because the other 4 members of the LLC are benefiting from the income (considering Aprilish is prime rental season) that they should also deduct the expenses that were used to maintain the property to create the income in April and forward).

Thoughts?

[Recked]

Eh, seems like a limited exposure issue, but you need to do what you feel is right.
What you are saying makes sense, from a textbook approach, but real world often varies from textbook.
Perhaps if the LLC had some type of debt instrument to repay the original member for the work, indicating that he laid out the money on behalf of the soon to be created entity?
What do the LLC creation documents say? Did he sell 4/5 of the property or was it created in some other fashion?
There's a lot more to this situation that I'd need to know to answer this comfortably.

[Bourne]

The “income” received before the company was created were advances for the rental season (May). So technically the LLC can claim the income seeing as how the LLC became the property manager per se in April.
This company does not own the real estate, it is merely acting as the property manager and taking in the income and paying for the expenses. The other members then invested in this LLC. The title to the property and the mortgage both belong to the owner himself, not the LLC.

I'm just simply bookkeeping the items for the company. The outside CPA tax preparer will be completing the tax return, he's been pretty hands on and he's saying that this is okay to do so I'm just going to bookkeep it. It seems reasonable considering the income isn't able to be recognized until after the company was created anyway.

[Recked]

If you're not putting your name on the return then I'd just do what they want.
It would be nice if you have it in writing/emails, so the tax prep CPA can't turn around and “blame it on the bookkeeper”, but I feel your exposure on this is very limited.
I wouldn't worry too much about it.
The IRS is a big fan of matching income and expenses, even if they appear a bit screwy on paper sometimes.
I wouldn't jump on that audit, but I think I could get it to pass muster/defend the position if I had to.

[Bourne]

Yeah, I have plenty of emails between the two parties with instructions on what they want. Thanks Recked!

[Recked]

Anytime!!! You're a CPA, why are you doing bookkeeping? LOL
Just kidding, I know the grind.

[Bourne]

I won't have my license until around May 2019 and around this time of the month I have a lot of free time during my day job so I figured I could make a few easy bucks lol

[Author]

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