Tax Questions - Calling All CPA's

[Ryan Collins]

I need help with a tax question - I bought a house with my father to flip at the end of last year. So, by government classification we were a general partnership at the time. We financed the house using a loan in our personal names because it allowed us to roll the financing of the renovations into the total loan at a low interest rate.

After closing on the property we moved all of our cash we put together into our new business bank account under our LLC. However, because of banking restrictions we could not change title of the home to the business name (typical with most bank loans). BUT we made the monthly debt service, utilities and maintenance payments from this business account.

The home has not sold yet and because our tax returns are not overly-complicated yet I am attempting to get this done by myself. I will hire a CPA this year after the flip sells but because we got screwed over by the original contractor in a BAD way money is an issue. Unfortunately right now things are a little too tight to pay a professional.

So my questions are as follows:

1.) The house did not sell in 2019. So my understanding is that we will be able to write off the money paid to the contractor and our holding costs against our ordinary income this year since this is a flow through entitiy and then pay taxes on the sale on the 2020 returns. Is this right? All of these costs should technically be considered COGS

2.) Or should all of this be capitalized (like construction in progress) and then accounted for on the 2020 return?

3.) We 1099'd the contractor what he was paid out of the draws back in January - was this correct?

4.) Should the LLC's COGS include the debt service, maintenance and utilities?

Btw - I'm a financial analyst/accountant I just don't have a CPA nor do I specialize in tax. But I do have some competency and have taken courses on some of this so I can at least keep up with the lingo.

Any help is appreciated! TIA

[Linda Weygant]

Originally posted by @Ryan Collins:

<snip>

So my questions are as follows:

1.) The house did not sell in 2019. So my understanding is that we will be able to write off the money paid to the contractor and our holding costs against our ordinary income this year since this is a flow through entitiy and then pay taxes on the sale on the 2020 returns. Is this right? All of these costs should technically be considered COGS

2.) Or should all of this be capitalized (like construction in progress) and then accounted for on the 2020 return?

3.) We 1099'd the contractor what he was paid out of the draws back in January - was this correct?

4.) Should the LLC's COGS include the debt service, maintenance and utilities?

Btw - I'm a financial analyst/accountant I just don't have a CPA nor do I specialize in tax. But I do have some competency and have taken courses on some of this so I can at least keep up with the lingo.

Any help is appreciated! TIA

#1 - No.  Remember you've got the Matching Principle (accounting 101).  Everything is WIP now and will convert to COGS when you sell

 #2 - It's all WIP - Work in Process

#3 - Yes, that's correct.  Issuing the 1099s was exactly perfect

#4 - Debt Service is a reduction of liability.  All of the maintenance and utilities go into WIP as well.