How to Deduct Purchase of A/R?

[TaxGirl3]

Medical practice client received a 1099 that includes Accounts Receivable that was purchased.  Total amount needs to be reported on 1120S line 1a as gross receipts. 

Does anyone have a recommendation as to the best way to deduct the purchased A/R?

Thank you!      

[sjrcpa]

COGS? Other Deductions?

[TaxGirl3]

That's the $140k question.  We're amending a return for this, so I'm thinking of optics.  COGS for a service business?  Other deductions on an amended return?

[BobKamman]

I must be missing something here.  Should have taken an accounting course back when I had time. Are they on cash basis?  In that case, wouldn't it just be included in gross receipts?  Or accrual basis? Why?  Is there a reserve for bad debts?  Or maybe these instructions help:

How to Record Invoice Factoring Transactions Without Recourse

1. Record the amount sold as a credit in accounts receivable.
2. Record the cash received as a debit in the cash account.
3. Record the paid factoring fee as a debit loss.
4. Record the amount the factoring company retained in the debit-due account.

[sjrcpa · Accepted solution]

I have loosened my stance on COGS sold for service businesses. It seems that lots of them do it now.

I don't think it really matters where you put it.

@BobKamman They paid for these AR. So while the receipt is Gross Income, they have a cost basis in them to offset the gross.

[TaxGirl3]

Thanks, I'll do that!

[BobKamman]

@sjrcpa "@BobKamman They paid for these AR. So while the receipt is Gross Income, they have a cost basis in them to offset the gross."

You lost me at "they"

[sjrcpa]

They = TaxGirl's medical practice client.

[BobKamman]

How did the clinic pay for their receivables?  Other than providing services.  Which gets me back to the question of why they would not be on cash basis, especially when having to wait for months for insurance payments.  But it's probably because their billing system is set up for accrual accounting.  Still doesn't make much sense.  

[qbteachmt]

The perspective gets a bit lost here: "Medical practice client received a 1099 that includes Accounts Receivable that was purchased."

The person getting a 1099 would be the person selling the AR. They sold their asset.

The people buying the AR bought an intangible asset. As they collect, their Asset value gets reduced. Essentially, it's an intangible inventory at a discount (COGS).

"the best way to deduct the purchased A/R"

The people posting AR as deduction are not the 1099 party. The people collecting the AR have a reduction in their asset (the AR) as they collect income against it, and the cost basis is like a COGS event. AR is more like a goodwill asset, though; not inventory.

It's not factored if it was sold. Factored is leveraged.

[TaxGirl3]

Thanks.

In this instance, my client is the person who bought the A/R, and my client received a 1099 when the payments came in.  We need to report the 1099 amount as revenue to avoid matching issues.  Are you suggesting deducting the purchased A/R as Other Costs on Form 1125-A?

[TaxGirl3]

@BobKamman 

My client paid cash to account for existing A/R and the A/R rolled in later that year.  No difference cash or accrual.

Example would be paying $140k for A/R to outgoing doc, later receive $540k from billing company, which includes the purchased $140k.  The 1099 amount is for $540k. 

[sjrcpa]

"Are you suggesting deducting the purchased A/R as Other Costs on Form 1125-A?"

That was my suggestion.

To everyone else- TaxGirl's client bought the receivables, presumably when they bought all of the assets of a practice. When patients, ins. cos, whomever, paid their outstanding bills TaxGirl's client received the payments. 

I don't think AR is a 197 intangible.

[BobKamman]

So the question really asked, "medical practice that was purchased received a 1099 that includes A/R owed to previous owner," not "medical practice received a 1099 that includes A/R that was purchased."   A paid B $X for business and the price included $Y for A/R.  An account was set up for A with $Y as A/R asset.  When C paid the $Y to A, it was charged to that account.  I get it.