Topic Thread

1.  Sch B to 1120S ??

Posted 6 days ago

After winding down his previous business, my client has continued to lend out more and more of his own money to private investors who are flipping and renting out homes.  He's deriving over $ 200,000 of interest income from it now.

We've been reporting this interest income on his Sch B, but it appears that this is becoming a real business, as he is incurring expenses for a part time bookkeeper, computer software, drive-by appraisal fees, marketing expenses, office expenses, etc., etc. 

Do you see any problem with moving his Sch B Interest Income into an S Corporation as Gross Receipts, and deducting all related expenses?  He would like to take a salary and make retirement contributions.




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Laura Weiner, CPA
Fort Lauderdale, FL
954.232.5388
LauraCPA@bellsouth.net
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2.  RE: Sch B to 1120S ??

Posted 6 days ago
Laura, I had a client who has also floated many loans over the years.  We had a similar discussion early on and decided against it.  Our primary reason was that if you were in a "business" of lending money, you are now treated like a bank and now subject to federal regulations, including discriminatory rules.  Also, I believe that your client would need to register as a bank (either federal or state).  Now that my client has somewhat retired, he "issues" his loans through a self-directed IRA.  This could be an angle to consider.

Now, regarding the transfer of the interest into an S-Corp. other issues arise.  Specifically, I don't believe that you can simply "assign" the loans to the new business.  You would most likely have to get the S-Corp to reissue the loans OR the S-Corp would have to "purchase" the loans from your client.

So, I would start by reviewing the Federal and Florida banking regulations before going any further.  IF you are able to operate as an S-Corp, I would look to transition into the S-Corp with new loans issued.

Steve

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Stephen Mankowski
215-674-5652
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3.  RE: Sch B to 1120S ??

Posted 6 days ago

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Abby Alhante,  CPA

 

Kurcias  & Alhante, LLC  CPAs

525 Broadhollow Road   Suite 104

Melville NY  11747

516.829-5890  Fax 516-829-3976

Mobile 516-381-9301

AbbyA@KurciasAlhanteCPAs.com

( E mail response preferred )

 






4.  RE: Sch B to 1120S ??

Posted 6 days ago
The banking laws are an excellent point.  One I would have notconsidered, but that is one of the beauties of a forum such as this. as we all learn together

As far as transferring the existing loans into an "S" corp, and there being concern, I would respectfully invite more discussion, because I do not see any pitfall. Why only new loans, not existing loans.

If an "S" proves to be the " entity of choice, I would feel it prudent to use a newly formed one. As there is consideration to the passive income and "C" corp earnings.    -  just to put that out there.

From my view, save for any banking regulations, it seems to be a good idea

Abby

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Abby Alhante
KURCIAS & ALHANTE, CPAs LLC
Melville NY
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5.  RE: Sch B to 1120S ??

Posted 5 days ago
my concern about the flow from Schedule B to S-Corp is similar in nature to having a rental property and deciding to put it into an LLC.  While there is no transfer tax, you would still need to have consideration to the current owner as he is bringing an asset into the new business.  It would have to be "purchased".  Think of this in terms of your personal mortgage that gets sold.  Along with notification of the new entity to pay, the new entity purchased these loans from the previous lender.

In addition, many of these loans go through filing with the County to ensure security of collateral, etc.   Given that the original loan is due to the individual and NOT the corporate entity, the assets might not be able to be collected upon in default.

Hope this helps.  And Abby, I did not take this as a challenge.  I understood where you were coming from.  And I totally agree.  The purpose of forums is to get opinions and gain knowledge that you didn't already have.

Steve

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Stephen Mankowski
215-674-5652
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6.  RE: Sch B to 1120S ??

Posted 5 days ago
Excellent answer      and i am  not surprised at all.

thanks for the response

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Abby Alhante
KURCIAS & ALHANTE, CPAs LLC
Melville NY
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7.  RE: Sch B to 1120S ??

Posted 3 days ago
Here are some additional considerations

1. Review Mortgages to determind assignability
 2. Work with a Title Compant to retain title
3. Review property and casualty insurance policies as they will need to include the new entity
4. Consider choice of entity - LLC generally preferred.  If S corp consider meeting Section 351 and avoiding 357
5. No "sale" will be required and no gain if #4 above met - if transfer to a SMLLC generally the transaction is disregarded
6. if transfer  to a partnership 721 generally protects contribution from tax
7. Transfer taxes (NY) should not result if mere change of entity and ownership remains identical - confirm with title company after your entity is       decided.

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Robert Barnett
CPA, ESQ.
Capell Barnett Matalon & Schoenfeld LLP
JERICHO NY
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