"DORFMONT[at]aol.com (Linda Dorfmont)" wrote:

- quote -

I don't think you need to worry too much about this. As far
as I know, the IRS does not make routine comparisons between
years. Only in the event of an audit will they become aware
of any difference in the details. Even then, they probably
won't do anything about it, so long as both methods arrive
at the same result. Only if you did something that resulted
in a lower tax would they get excited.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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"James Lewis" <j...[at]verizon.net> wrote:
- quote -

There wouldn't be any difference in taxes since both the
COGS section and the G & A section are above the bottom
line. The issue is attracting the IRS attention with a major
difference in Gross Profit (in the middle) from one year to
the next. I don't think this needs IRS permission.

Linda Dorfmont E.A., CFP, CSA

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"Harlan Lunsford" <hnslunsford[at]bellsouth.net> wrote:
- quote -

I found this to be an interesting post because I knew there
would be several ways to view this problem. Now I'll play
devil's advocate by introducing another "solution";

Technically, the person preparing the 2005 return apparently
did not seek/receive permission to file for a change in
accounting method. Even if a method is flawed, changing it
requires permission. Therefore, consideration should be
given to amending the 2005 return to use the old method,
then file 2006 and 2007 the same "wrong" way since the time
to apply for an accounting change has lapsed for these year
too. Finally, for 2008, make application to change the
accounting method and give the taxpayer the 4 years to make
up the tax increase difference. The obvious problem with
this solution is explaining why the 2005 return is being
amended. It will necessitate admitting what items and why
they are being changed, which might be questioned:-)

Mike

btw, I think that saying is ...."worth two in a bush"....as
if you didn't know but just didn't want to use the "b" word?

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DORFMONT[at]aol.com (Linda Dorfmont) wrote:

- quote -

This is similar to a client here who bought more than a 100
acres for development. Each commercial parcel was of a
different size, and the residential lots more or less equal
in size. All costs had to be first identified with the
parcels affected and then capitalized according to acreage
of each parcel. Thus all lost were part of inventory.
Even the interest was capitalized, thus there was very
little g&a expense.

- quote -

I don't see any way out of taking allowable depreciation as
a matter of course. After all, a bird in the hand is
worth.... two.. uh... how does that go?

ChEAr$,
Harlan

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DORFMONT[at]aol.com (Linda Dorfmont) <DORFMONT[at]aol.com> wrote:

- quote -

Conflicting rules.

One rule is that you should pick a legitimate method and
stick with it.

Another rule is usually these expenses are part of COGS.

If I had been doing this from the beginning it all would go
into COGS. At this late date, I'd leave it alone unless you
determine the previous method was wrong.

Your other question: Since you treat the houses as
inventory, you would not depreciate inventory. Your answer
would be even easier if the house was acquired and sold the
same year. That's because you do not depreciate anything
acquired and sold the same year.

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I recently acquired a corporate client (C Corp.) who buys
residential real estate, fixes it up and resells it. His
previous CPA put most of his operating expenses (property
taxes, mortgage interest, sales expenses, etc.) into the
general & admin. section of the P & L. Last year (2005) he
had to change accountants and the new one put all that into
cost of goods sold. Needless to say there is a vast
difference between the gross profit sections of the 2004 and
2005 returns.

What is the preferred way (that will make IRS happy) of
reporting these expenses? I tend to side with the first
accountant who specialized in this area.

Both accountants showed the property assets in "other
assets" on the balance sheet. I would treat this as
inventory since that is what it is. I guess my manufacturing
background is coming out. Is there a reason it is not shown
in inventory?

Also my client is buying property to flip in Texas. He plans
to hold it for a while until the market recovers to a level
where he can recover his costs and make a profit. If he
rents the property out for the convenience of his company
while he is holding it, does he have to take depreciation?
The property was acquired in the normal course of business
and will be sold at an appreciated price. The rental is just
to get some income to cover costs while it is being held.

Linda Dorfmont E.A., CFP, CSA

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