Question about how Gross income should be reported on a flipping business...

[Faiz Kanash]

Hopefully this doesn't sound more complex than I need it to be. I recently had my taxes filed with a new CPA, and i'm not 100% certain if my taxes were filed correctly. Im a fix n flipper, and this is my first year reporting income from the business to the tax man and I don't want my taxes to have been reported incorrectly for fear of future issues should they arise. 

The main problem I noticed was how much was reported as gross, which seems much lower than what I anticipated. Without getting too deep into my own personal financials, ill create a quick scenario. 

(This is filing for a s-corp) My gross was reported as 130k on my taxes(Not actually), however, when I've sold the properties i've received 2 checks of 200k and 300k that were deposited into my bank. These checks are after all closing fees and the remaining mortgages were paid off, meaning it's my profit. Deductions would be the original deposit I had put into the property, material and labor, and all other deductions such as utilities. Lets say my total profit for the year after all deductions come out to 100k. 

Would the gross amount on my taxes have to be $500k because of the large checks I've received, then apply the deductions to that amount? Or, is it based off of the total profit from the house flips before deductions, which is what I believe my CPA had done? Also, my CPA filed the income as 'short-term capital gains', and after a bit of research i've seen that my income was suppose to be reported as standard income, or is that not a big deal? I want to ensure my taxes are solid, since I would like to be able to qualify for a traditional mortgage next year rather than continuing to work with hard money lenders due to the rather high interest rates I deal with(I still make it work, but of course more profit to be made with a conventional mortgage).

Thank you!

[Max Emory]

Hey @Faiz Kanash, having a great REI-savvy bookkeeper would fix this issue pretty quickly. You need a complete and accurate income statement (profit & loss).

Your "gross income" for flips will be what each property was sold for (top line). Your "gross profit" for flips is going to be what the property sold for minus all Cost of Goods Sold for the property (purchase, closing costs, renovations, holding costs, selling costs, etc). 

From there, you'll deduct all of your other business expenses that are not property-specific. And, you may have some "other income" and "other expense" transactions to consider as well (bottom of profit & loss). 

Then, the remaining number is your net income which you will be taxed on (bottom line).

Totallly agree with @Bill Hampton. You need to get a second opinion on your tax return.

And, I highly suggest hiring an REI-savvy bookkeeping firm to keep your bookkeeping records up-to-date and accurate. They will also be instrumental in catching errors within your tax return. We catch errors all the time made by our Clients' tax professionals in the REI space.