Discussion:Expense on Behalf of customer
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Discussion Forum Index --> Tax Questions --> Expense on Behalf of customer
| 18 December 2007 | |
| S Corp Client did a job developing software for which they will be paid to maintain $5,000/mo
The customer of the S Corp agreed to pay the fixed expenses of purchasing server hardware. S Corp bought the hardware, $50,000, and then invoiced Customer and was paid $50,000. How would you classify this income of $50,000? Would it be Cost of good sold, since he purchased it and sold it at cost. Or would it be "Other Deductions"? I don't think it should be assets depreciated, since the S corp doesn't own the servers, but rather they just got it on behalf of the customer. Any suggestions? | |
Bottom Line (talk|edits) said: | 18 December 2007 |
| I'd do COGS | |
| 18 December 2007 | |
| COGS here as well. U sure the developer didnt make no profit? Tehe. | |
| 18 December 2007 | |
| I don't think it makes a big difference. We have always run the cost and reimbursement through a Advanced Costs account. This is because we do not do it very often. If it were a regular thing, I would treat it as inventory. There are sales tax implications that need to be considered. | |
| 18 December 2007 | |
| Hi Pegoo,
The agreement between the S Corp Developer and the Customer specifically states that the fixed hardware & bandwidth expenses are to be paid by customer at the cost and not a penny more. The Developer then sent a copy of all the invoices to the customer to prove the costs. BTW, does it look bad if COGS is greater than income from those goods sold? This may happen since there is still $2500 balance of hardware that hasn't been paid "Re-Imbursed" to S Corp yet, and probably won't be until 2008. | |
| December 18, 2007 | |
| I don't think I would run it through COGS. You said it is clear your client is not going to own the hardware and the intention from the beginning was to have the other party reimburse your client. Why not report it as follows?
1. Db. Reimbursement Receivable Cr. Cash Cr. AP Record purchased of equipment 2. Db. AR Cr. Reimbursement Receivable Record invoice 3. Db. cash Cr. AR Record payment | |
PHIL MOODY (talk|edits) said: | 19 December 2007 |
| Just for info purposes, did the S corp charge the customer sales tax? | |
| 19 December 2007 | |
| Phil n IRSfixer raises a good point in regards to sales tax. I don't think businesses are prohibiting from selling inventory at cost. The $2500.00 will not be in COGS but rather Goods available for Sale (inventory) account until it is sold if the SCORP is using CASH Method. | |
| 19 December 2007 | |
| The sales tax issue is exactly why I would not classify it as COGS. Furthermore, it seems in substance to be a reimbursement. They likely paid sales tax when they bought the equipment and if it was a sale of goods, sales tax would be due again on the "resale". | |
| 19 December 2007 | |
| I believe the problem relies on who will own the equipment. OP states the SCORP does not own the equipment and the substance should be a sale. Qman also said the 50k was for equipment and bandwidth fees... I believe this changes everything.
SCORP incurs a bandwidth expense and books revenue from that 50k to off set it. Client will own the equipment which is a sale from the SCORP to Client as substance. I guess the SCORP should now bill the client for sales tax not collected? Server equipment should not cost that much. 100Mbit FastE lines are about 3k a month (multi homed). QMAN, how much is the equipment and how much is the bandwidth fees? | |
| 19 December 2007 | |
| Hi All,
The SCORP did pay sales tax on all the equipment, and it was passed on the client as the total of the invoices. The Client is Overseas, so I don't think sales tax applies to them? The equipment was the bulk of the $50k, it is very high tech high load equip, I believe $40k of it was equipment. | |
