Income

[MGC94]

Very confused on what to do with this. Any input would be appreciated.

I do the bookkeeping for this partnership. The son is now 99% owner and dad is 1%. 

They own a construction business. 

1065 line 1 $412,942

Line 23 income $142,560

Deductions were $270,382 

I have every transaction out of the bank account on excel. 

The credits and debits are all accounted for. 

People give them money up front to build a house, but they might not spend all the money on materials that year. He is saying he's not paying tax on $142,560 because it not his money. 

So, if someone gave him $200,000 to build a house in December and he didn't spend the $175,000 on materials before 12/31/23 what am I supposed to do?

Typically I do deposits vs debits.

Then I would think tax year 2024 since it has more expenses would be less income that year    

[TaxGuyBill]

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@MGC94 wrote:

People give them money up front to build a house, but they might not spend all the money on materials that year. He is saying he's not paying tax on $142,560 because it not his money. 

So, if someone gave him $200,000 to build a house in December and he didn't spend the $175,000 on materials before 12/31/23 what am I supposed to do?

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Is this a Cash Basis business?

Is the money the customers pay your client refundable?  In your example, the customer pays your client $200,000 and then the customer decides to 'back out', would your client give the $200,000 back?  It is not taxable income until it becomes non-refundable to the customer (your client will keep it no matter what).

[qbteachmt]

"He is saying he's not paying tax on $142,560 because it not his money."

Yes, it is, if he doesn't have a Trust Account and a Trust requirement. He's given funds, which are now available to him. He doesn't have to use it on their project; he just has to be able to fund their project when that job starts, and apply the prepayment to what they would owe, to avoid having the same client pay again.

As this business grows, he can consider moving to an Accrual Basis, and that would allow him to treat the funds as liability until earned; construction in progress and a contract completion operation. That gives him the ability to treat the funds as income and reduce liability at each milestone. Or, he works with a banker to manage construction draws and stops accepting his clients' funds directly. Put it into Escrow.