Past due Rent from Corporation where shareholder owns 69% of the stock

[jk2]

A Corporation is required to pay the shareholder that owns 69% of the corporation a fair rate of $8,500 per month for rental of a business building.   The corporation has experienced some cash flow problems and the shareholder has not been paid for 4 months.  The corporation continues to accrue the $8,500/month as an expense on its profit and loss statement.

1.  How much should the corporation include on its 1099 Misc Form?  $8,500 x 8 months = $68,000 or $8,500 x 12 months = $102,000?

2.  How much rental expense will the accrual based corporation deduct on its for 1120?  

3.  How much will the cash basis taxpayer deduct on his 1040?

4.  If there is a difference does anyone have suggestions on how to reconcile it?

[qbteachmt]

Is the corporation on cash or accrual basis for tax purposes?

[qbteachmt]

Oh, for item 3, what is there to deduct?

[jk2]

Corporation is accrual

and I apologize.   I did not see it display twice...

[jk2]

Once again, it was late at night.

What I meant to say is if the income is put on line 3 of Schedule E, should an expense (deduction) also be listed to match the income the cash basis taxpayer actually received.

[JRC]

The Cash amount of $68,000.00 is all they paid and he received. I would question the Deductible amount on the Corp. return. 

[Karen_pdx]

1) Form 1099-MISC should be prepared on a cash basis, so should show $68,000, assuming the payments were paid by check and not a third-party payment method like Venmo or PayPal.

2) The accrual basis taxpayer cannot deduct an expense (e.g. accrued rent) payable to a related party until it is included in income by the related party. See IRC Section 267(a)(2).  A 67% shareholder is a related party, so if the shareholder is on the cash basis of reporting for tax, then the corporation cannot deduct the rent until it is paid.

3) Cash basis shareholder reports $68,000 as rent income.

4) The unpaid accrued rent of $34,000 should be reconciled on Sch M-1 on the corporation Form 1120 as an Expense Recorded on Books, Not Included on Return, which will increase the taxable income as compared to Net Income Per Books and will show on page 4 of Form 1120.