Income or not?

Question

Are the draws I take for rehab on my properties considered other income on my P&L statement or are they not included at all?  My reason for asking is because all my expenses (subs, material, interest, and utilites) are on the statment and it really is looking bad. I know its not taxable income I just looking to clanup my P&L.  This is a good question for my accountant but due to the time of year I can't get in to see her or even get her on the phone until 2/6.  Thanks in advance for any help.

Bill Walston · Answer

Bob

The draws against your construction loan would NOT be income and should not show up on your P&L.  The draws should show up as a debit (increase) to your cash account and credit (increase) to a liability (probably "construction loan") account.  The costs for subs, materials etc. that are part of your rehabbing costs should also be removed from your P&L.  These are items that need to be added to the cost basis of your property.  This will reduce the expenses on your P&L.

You're right...these are good questions for your accountant and I'm sure she will review them with you when you meet with her.  In her defense, this is likely her busiest time of the year and she probably has clients "lined up" for appointments.  This is why I stress that communication with your tax pro should be on-going and not just during the tax season :)  That being said, if she is difficult to speak with all during the year, and not just during the tax season, it might just be time to look for a tax pro that is more accessible.

Ebere Okoye · Answer

Draws on the rehab actually belong on the balance sheet as a liability item since its hard money that needs to be paid back. When expenses are incurred, they are actually inventory not expenses on the balance sheet as well.  Your expenses on rehabs are not expenses until the property is sold. They should be added to the cost basis and therefore belongs on the balance sheet. If you do this. then your p&l should look clean.

On another note, I don't think any investor should have to wait that long to get their important questions answered by their accountant. please look out for what to look for in your cpa here: http://thewealthbuildingcpa.com/index.php/home/167-how-to-put-together-your-wealth-building-team

Bob Harris · Answer

One more question for you guys since youve been so helpful.  Where do the proceeds from a cash out refi go, other non-taxable income account and disperse from there or just add it to my basis like a const draw?  This is my last tax question.  Thanks again

Bill Walston · Answer

Agreed Steven.  But here in my neck of the woods,  the rehab expenses are added to the cost of the project, which is treated as inventory.  Rather than treated as current expenses they are deducted when the property is sold as 'cost of goods sold.'  The profit from the sale of rehabs is, of course, treated as business (ordinary) income.  Is that how you see it?

Steven Hamilton II · Answer

Bob,

Since you are a single member LLC operating as a sole proprietorship, you will not show any payments taken to yourself on your P&L; These will however show up on the balance sheet. Thank you for clarifying on the construction loan. Your draws on the loan will not be considered income. The actually account transactions are just as Bill put them. Are you in the business of buying and holding properties or of flipping them?

If you are in the business of buying and holding then you will add all costs to the basis of the property.

If you are in the business of rehabbing and selling: The interest paid will be a deduction as well as the construction and rehabbing costs, subs, materials, etc.

Usually these first couple weeks are not too busy for most of us except for readying our offices and sending out reminders.  Be sure you review the qualifications of your accountant and be sure what types of returns they prepare. Ask what type of CE and how much she takes each year. I make sure my clients can reach me all year. My family even gives me a hard time on vacations when I pick up and return client phone calls.

Bob Harris · Answer

1. P&L is for the business only.
2. Single member LLC.
3. Just draws

The draws I am refering to are construction loan draws all the draws I took for payments to myself are shown on my balancesheet.

4. I dont exactly know.  She has been pretty good in the past but the last couple of years she's been very difficult to get on the phone.

Steven Hamilton II · Answer

Bob,

A little bit more information would be preferred.
1. Are you referencing your personal P&L or do you only compile one for your business?
2. What type of entity is your business?
3. How did you pay yourself?(paychecks, just draw)

If you have an S corp you should have given yourself a reasonable wage. Your wages are all that should be deducted on your P&L.
If you are a sole proprietorship you should not have any payments to yourself deducted.

Out of curiosity, I have to ask why your accountant is unreachable at a time when you're supposed to be able to ask these questions.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

Income or not?

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