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Discussion:NYS gross receipts

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Discussion Forum Index --> Basic Tax Questions --> NYS gross receipts


Discussion Forum Index --> Tax Questions --> NYS gross receipts

Kbairtax (talk|edits) said:

10 March 2014
Have a rental management company. They take in over $1 mil in payments per year and dole out about $800k of that to the property owners within a week or so of collection. What's left is the actual gross income to the management company.

Gross receipts as I know it is any amounts received by an organization regardless of source. Does anyone know if there are any special circumstances for rental management type biz's?? I have looked and I am coming up empty so I likely have my answer, but want to be sure. Of course the reason for this question is I am hoping to save some NYS franchise tax!

Thanks!

Ckenefick (talk|edits) said:

10 March 2014
Gross receipts as I know it is any amounts received by an organization regardless of source.

For starters, I would say that it's gross receipts that actually belong to the organization, not gross receipts collected, held and remitted as an agent of the property owners.

Kbairtax (talk|edits) said:

11 March 2014
Thanks Chris......I agree.

I don't know why I am spacing on this. I picked up this client from local CPA that just did not want to deal with the client anymore (personality conflict mostly). He did the first 3 years returns including all the money taken in as gross receipts then taking an expense deduction for the monies paid to the property owners for rents, real estate taxes and insurance pmts. I got to thinking last night that he cannot be right.....all that is a liability to the organization, not income to it. I always second guess myself on things like this since I am not a degreed accountant. Just want to be sure I am not missing something.


Gross Receipts Defined: Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.

Nilodop (talk|edits) said:

11 March 2014
Can't take that definition quite so literally. If you do, then gross receipts would include proceeds of a loan.

Ckenefick (talk|edits) said:

11 March 2014
all that is a liability to the organization, not income to it

I would say: It doesn't even rise to that level. It is not your client's money, at all. Shouldn't even show up on your client's books.

If done right, we segregate what belongs to the property owners, in a separate bank account, from what belongs to your client. If your client is due a mngt fee, a check is written from the one account to the other. This type of accounting is not unlike an Attorney's Trust Account.

Kbairtax (talk|edits) said:

11 March 2014
Chris....

Thanks for the confirmation....not sure why I was second guessing myself on this.

Ckenefick (talk|edits) said:

11 March 2014
It's a bit confusing...one of those areas where, when we realize it's not our money, and it's just an Agency relationship, the light bulb comes on...not a whole lot different than client accounts held by a brokerage house. Hopefully all that cash Lenny owns *isn't* showing up on Merrill Lynch's balance sheet...(or where ever Lenny stockpiles his fortunes)...

Kbairtax (talk|edits) said:

14 March 2014
Dear God Help me.....the plot thickens. Let me preface with all this crap is in one bank account. She knows she needs a trust account and will be setting one up and then this becomes easier. I just have to get thru the 2009-2013 returns.

So getting back to this and I realized once I started "fixing" the books to move the rents and related expenses to a liability account and out of the income stmt that she now has a negative liability. Yes, she has paid out more than she has taken in. The reality is that she is running about $50K behind at the end of each year. She has paid out the expenses, but has either not received a check from her clients to bring their account current, or she lets the balance ride and then does not give the client the next few months of rent collection until they are current. There were a few clients that owed her over $10,000 at the end of one year it is adding up quick. She is cash basis.

The client has a separate software program specifically for this type of biz that keeps track of all the management fees and rents taken in as well as the expenses paid out for each of her property owners. So I have a year end figure for each client and it ties to the "negative liability" on the QB file. Also, the bookkeeper had journaled the amount shown as management fees in this software program against the rents collected to arrive at Gross income for the mgmt. company.....but I got to thinking that if she is owed money, is that really right.

So, my question is, since these people owed her money at the end of the year, do I have to assume it was for the repairs and other expenses only, or would it be reasonable that the balance owed could net the management fees charged??

Opinions please. I need to get this damn thing off my desk.

Ckenefick (talk|edits) said:

14 March 2014
With respect to those clients that don't have a Debit (A/R) balance, I suppose we could say that your client's fee was paid, if the current client credit balance is enough to absorb it. I mean, all the money is in the same account, so it's hard to say if it's actually been paid or not. But if I were your client, and if the Other Software Report shows the fee for these clients, I think we treat it as having been paid.

If upside down client owes her $10k without considering her mngt fee, do we increase the A/R and credit real, actual Karen's Client income? Doesn't seem right on the accrual basis. And, I'm not sure what was shown on the "Other Software" reports and what was given to the client in terms of monthly reports. Maybe if we do debit A/R some more, we use a separate A/R called "Unpaid Mngt Fees Receivable" and make an M1 adjustment on the tax return...or something like that, depending on how the Sch L Balance Sheet gets presented.

Kbairtax (talk|edits) said:

14 March 2014
She is on cash basis.

With respect to those clients that don't have a Debit (A/R) balance, I suppose we could say that your client's fee was paid That is what I was thinking. Total Management fees per the other software is approx. $140K. The debit A/R balance is approx. $57K.....so if I net them I am at $83K of fees paid.

The other software's reports are basically Rents received, then a listing of expenses which includes the management fees and all other expenses paid for the client. they do not book in the other expenses until my client actually pays them. So it is a reconciliation and if the end result is negative when my client receives the next set of rent monies then the her clients don't get any of it.

I could go back thru and look at each one and if the negative ending balance is less than the management fees then I could make the assumption that they were indeed paid. I have the year end printout for everyone. (yes there are at least 300 of them). That makes no sense....sorry

Ckenefick (talk|edits) said:

15 March 2014
Yes, cash basis, I'll change my accrual reference...If we have one account co-mingling the recipient's potential income and the payer's potential deduction, how do we ascertain if the fee has been paid.

That is, what if there's one rental customer who, before considering the annual $1,000 management fee, has a $1,000 balance in his or her account. On the Balance Sheet, we'd have $1,000 in Cash (in the commingled account) and a $1,000 Liability reflective of this money belonging to the rental customer. Has the fee been paid or not? Really hard to tell, since if it is paid, Cash won't change. And, we can logically say it wasn't paid since the Liability is $1,000. All we really need to do to recognize the payment is debit the Liability and credit (your client's) Income. But, no money has changed hands. So, obviously, it's hard to prove things, one way or another, with or without a journal entry. We would have it anyway we'd like it.

Total Management fees per the other software is approx. $140K. The debit A/R balance is approx. $57K.....so if I net them I am at $83K of fees paid.

It's hard for me to follow this a little since I don't know what has or hasn't been booked on the regular books. So, let's pretend client starts the year with $10k in the bank account and Equity is also $10k. Let's pretend client ends the year as you describe (the $140k and $57k numbers). And let's pretend your client contributed $57k of her own cash equity during the year. Ok, we end the year like this on the Balance Sheet:

Cash is $10k [start with $10k, add $57k contributed, minus $57k to fund the negative rental customer operation. But note, one item on the Other Software is Mngt Fees, which does not involve money coming into or going out of the one bank account. As such, $57k really wasn't spent to fund the operation. We'd have to know what the Mngt Fee charges were. Let's say they were $30k. This means that only $27k of the $57k A/R represents cash funding of the operation. So, let's restate Cash...]

Cash would be $40k [start with $10k, add $57k contributed, minus $27k to fund the negative rental operation].

Receivable would be $57k.

Paid-in Equity would be $67k [$10k start + $57k contributed]

As you can see, Assets are $97k and Paid-in Equity is only $67k. Our Plug is the $30k of Mngt Fee Income.

If we take the position that all $30k was unpaid, then we'd want to split the Receivable into two accounts: $27k would represent Receivables from hard cost outlays (valid, even on the cash basis) and $30k would represent unpaid management fees (not valid on the cash basis)]. (And taking this position isn't all that bulletproof...IRS could assert that it was paid, then your client personally contributed capital to cover rental customer hard costs).

If the tax return Schedule L is presented in this fashion, we basically have booked a $30k Mngt Fee Income accrual, so we'd remove it from Page 1 of the return as Gross Income and we'd make an M1 adjustment for it. Or, we'd convert our accrual basis books to cash basis books and present the Sch L on the true cash basis.

Finally, we should realize that we should be doing more than looking at ending balances. For example, our ending A/R balance was $57k in total. We look at the fees charged ($30k), for example, and determined that hard cost outlays were $27k (or at least we took that position)...meaning that we also took the position that all $30k of charged fees were unpaid. Technically, we need to look at the delta, or the change in the A/R account from 1/1 to 12/31. We kind of did this in my little example, only because the opening A/R number we made up was $0.

(And as a sidenote, cut things off on 3/31/14 and set up a 2nd Bank Account effective 4/1/13. On that day, move money from one account to another to make the segregation. But you've probably already thought of this).

Kbairtax (talk|edits) said:

15 March 2014
Chris, can't thank you enough for taking the time. I am following what you are saying, I think.


The balance sheet coming out of 2008 had $3,469 in cash and that was it. The prior CPA netted everything together so I am on a clean slate for 2009.

I have charged management fees of $138,309.

The aggregate of rents collected, rents paid out to property owners, and payouts paid on behalf of the property owners, I have -$57,357. (this is not her operating expenses, just all the expenses that are incurred by the property owners. In a perfect world they would pay them all back to her by year end.)

So in order for it to be paid out, it had to come from somewhere. Since the only income is the management fees income ($138k), then would it not follow that I either have an expense of the $57,357 or (since it was paid on behalf of others and not an operating expense to my client), or that she did not take her full fee since there was not funds to do so.

Since I am cash basis and only recognize income when received, then there would be no A/R. I realize I have a bit of a hybrid here since she is comingling all of this. I guess I just need to be sure I am standing on a good leg if I take the position I am taking. (that she just did not get all her fees because funds were not available)

If this had been done right and had separate bank accounts, then she would not have been able to transfer all of the $138K in fees she was due since there were no funds available in the trust account to do so. In fact, she would have likely transferred less than the net of the $138K minus $57K because she would not have bled the trust account dry.

What do you think?

Ckenefick (talk|edits) said:

15 March 2014
So in order for it to be paid out, it had to come from somewhere.

I think you're saying that "cash out" [expenses paid on behalf of rental customers plus cash payments remitted to rental customers] exceeded inflows from tenants. And note, I am ignoring non-cash items, like the Mngt Fee and other charges your client would have charged to the rental customers, like a flat fee for some service, like eviction.

If so, and if our cash outflows exceed our cash inflows, how was this shortage funded? As you say, it had to come from somewhere, but where?

Kbairtax (talk|edits) said:

15 March 2014
Yes, that is exactly what I am saying. So in order to continue to pay the outflows, she did not collect her management fees. She left them in the non-existent trust account. They are still owed to her and will recognize that income when it comes.

So fast forward to 2010 and if I do all this the same way, I end up with $252K of income but management fees per the other software for 2010 were only $173K. So if I assume she was paid up for all the fees she was owed from 2009, then that would be $230K. So the extra $22k should be what she owes to the property owners which I ignore because it is really not part of her books.

I guess I am trying to get this all looking like it should have if she had separate accounts.

Or am I trying have my cake and eat it too??

Ckenefick (talk|edits) said:

15 March 2014
Back to my last question: Thinking about this from a banking perspective only - money in, money out - If "operating" outflows exceed operating inflows, then wouldn't she need to have used borrowed funds or contributed equity so as not to overdraw the bank account?

And again, I'm talking cash in, minus cash out. Her Mngt Fee would have no bearing on this, because it is neutral to the extent it is not withdrawn from the account.

Or, am I missing something? That is, is your $57k number pure cash in and out, or has the mngt fee been included as a deduction in arriving at it?

Kbairtax (talk|edits) said:

15 March 2014
I hear ya. And yes, that would be true she would have had to contribute capital. But that did not happen.

Based on what I see on the statements of the property owners, there are negative balances on their individual accounts. My clients management fees are contributing to that negative balance as she basically has either paid out to the property owner too much money or has paid out too much in expenses for that property owner. So, I looked at it that the balances owed are purely her management fees. If they were not in there, then these clients would be positive.

Each owner has his own P & L per-se. So rents collected then minus management fees and other expenses paid out. If the balance is positive at the end of each month, she sends the property owner a check to make them zero and the process starts again the next month. So I looked at all the sheets at year end and added them up to see how many people owed her money because she paid them too much during the year.....and it was close to the $57K.

I guess at this point I just have to establish a pattern and stick to it to get thru this until she starts doing this correctly. I just cannot see any way other around this that would be any more correct. If I do it the way the original guy did then it is totally wrong.

What would you do in my shoes???

Ckenefick (talk|edits) said:

15 March 2014
and it was close to the $57K.

Ok, so your statement above was inaccurate when you said "yes" to this:

I think you're saying that "cash out" [expenses paid on behalf of rental customers plus cash payments remitted to rental customers] exceeded inflows from tenants. And note, I am ignoring non-cash items, like the Mngt Fee and other charges your client would have charged to the rental customers, like a flat fee for some service, like eviction

If you're working off of the Property Owner Statements, these statements include charged management fees - a Line item which is, per se, a non-cash item.

Anyway...if you've already reconciled the 12/31 bank statement, haven't you already booked the $80k of "management fee income received?"

Kbairtax (talk|edits) said:

15 March 2014
My apologies. Yes, I was inaccurate. Must have been that my eyes were bugging by then.

Hope this helps.

2009

Total rents received was $1068972 (deposits to bank)

Total Pmts to Prop Owners $ 531311 (checks written)

Total expenses "paid" for property owners $ 456709 (checks written-this does not include mgmt. fees)

Leaving $ 80952 (left to be paid for mgmt fees)

Total mgmt fees for 2009 per the owner statement was $138309


2010

Total rents received was $1513192 (deposits to bank)

Total Pmts to Prop Owners $ 813844 (checks written)

Total expenses "paid" for property owners $ 447233 (checks written-this does not include mgmt. fees)

Leaving $ 252115 (left to be paid for mgmt fees)

Total mgmt fees for 2009 per the owner statement was $173129.

I think I need to leave this overage as income as I think it ends up being a timing issue. I think she got the $57K of missed fees in 2010 and then also collected her mgmt fees for Jan 2011 early. 2011 is swinging the other way, where I have the same situation as 2009.....not enough left after payouts to also "pay" the mgmt fees.

Again, I think I need to establish a pattern of accounting for all this and stick to it until she gets this set up right which I think will be a rude awakening for her. She has been using the "float" in the account to make it all work and that will be gone when she does this right.

Ckenefick (talk|edits) said:

15 March 2014
Yeah, I think you have to assume that all non-Mngt Fee bills are paid first. That is, kind of, the reality of things. We have evidence of paying third third parties. Of course, the issue is that it is all co-mingled. So again, IRS could argue that the fee was paid first, and she simply put it right back into the same account.

STG (talk|edits) said:

15 March 2014
I'm not an accountant (just a tax guy), and may be misunderstanding, but as a rental property owner with a manager, this scares me. Even though you're describing her covering clients negative balances with her management fees, it looks to me like she has to be, at least to some extent, using one clients income to cover another clients losses.

I can't see this as being legal.

If the house of cards all falls apart, would there be enough money to pay all the clients their share of the money owed them?

I always assumed that my money was sacrosanct and segregated from other landlords money.

Am I just being paranoid?

Ckenefick (talk|edits) said:

15 March 2014
No, you're not being paranoid.

If the house of cards all falls apart, would there be enough money to pay all the clients their share of the money owed them?

No. Easy test is this: Add up balances owed to those rental owners that have positive balances in their accounts at year-end (without netting against those with negative balances). Compare to year-end cash in bank.

Karen's client is a bad business person. She should not be paying expenses on client properties if doing so puts property owner in an upside down position. In life, you should always start things out the way you mean for them to go. Once you start down a path like this, it is difficult to reverse it. At this point, property owners have formed an expectation. And, I suspect, they'll told their friends about Karen's client, "Guess what, you'll never believe this...My property management lady is like a bank, she's extended me $10k worth of credit...you should definitely use her." Real, real bad business. One of the first step to correct it is to segregate things.

Kbairtax (talk|edits) said:

15 March 2014
Chris....I guess she will have to take that chance. I have told her what is going on and how it is looking and she has some understanding of it. I am thinking this is all too small for them to do a full blown audit. But at the same time I don't want to put myself in any jeopardy. Someone has to do this for her to get her out of this mess and on the right track.

STG....You are NOT at all being paranoid. That is exactly what she is doing. If the house of cards does collapse there would be issues. Not sure if she has clients that just don't ask her for monthly detailed billings or just don't care when they don't get paid. I find either hard to believe but apparently she gets away with it because they stay with her. We have had some serious conversations in the last month and she knows that this has to change and wants it to change. Right now things are so upside down that she is losing her ass.

I would not assume that your funds are segregated from others unless your mgmt. company has a separate bank account for each client. Which is not likely.

Ckenefick (talk|edits) said:

15 March 2014
True, as to your last sentence. I doubt it's "illegal," except for Security Deposits. All it is is an Agency Relationship, a business relationship, where people take risk.

STG (talk|edits) said:

15 March 2014
I don't expect my relationship with a property manager to be a "risk". I'm not investing my money, I'm paying for a service. I don't see how a property manager doesn't have a fiduciary duty to protect my money.

The behavior might not be illegal, but I find it hard to believe it's not, and it is certainly unethical. Luckily I don't let my property managers keep more than a token amount of money to cover unexpected expenses.

Ckenefick (talk|edits) said:

15 March 2014
I don't see how a property manager doesn't have a fiduciary duty to protect my money.

I'm sure there is. But what you're proposing is a separate, dedicated account for every single property owner. I just don't see that as workable. Even a law firm only has one trust account.

STG (talk|edits) said:

15 March 2014
I'm not really proposing a separate bank account, just separate accounting. The property manager should never run a negative on an account unless made up by the businesses money, NOT other clients money. Surely a property manager collecting 10% of every rent payment should have funds available to cover short falls, otherwise they shouldn't pay an expense unless the individual client provides funds.

The money they collect in rent is mine, not theirs. I don't see how they have any legal right to use the funds for anything other than expenses on my property or fees I owe them. Any shortfall by other tenants is their responsibility, not mine.

STG (talk|edits) said:

15 March 2014
The best argument in favor of that is that they don't claim it as income. They claim just their portion. If they have a legal right to use it, they would need to claim it as income and then take a deduction for what they remit to me.

STG (talk|edits) said:

15 March 2014
I know the next point will be a bank. But a bank pays me for the right to use my money for other clients. I pay the property manager to manage my property. Big difference.

Kbairtax (talk|edits) said:

15 March 2014
Kirk....It is certainly not ethical, and my client knows this, but just like a ton of businesses out there, until something goes wrong they are complacent and let things ride. One month turns into one year turns into 6. It's a slippery slope.

Luckily she knows she is in the wrong and in a bad position and is willing to fix it. She has capital to invest so there is a path out of this mess for her if she takes it seriously. Hence the only reason why I took on this debacle. It has put a ton of gray hair on my head over the last month or so.

Ckenefick (talk|edits) said:

15 March 2014
We are all saying that the current arrangement in the OP sucks. STG is further saying that if he uses a property manager for his own rental, he would expect that if he has a $10k "positive" balance with the management company, this sum should be free and clear of risk of loss. His point is taken, but I'm not so sure that is the law in this area. Theoretically, if we were to use a single "trust" account, we would need to ensure that, at any given moment, when we add up all the positive balances in the accounts of the "good property owners," that the Trust Account would have at least this much cash in it (tenant deposits aside). All I'm saying is that I'm not so sure that is the case, legally. You have essentially trusted the Mngt Co, as a business decision, to do right by you. In my mind, this is not a lot different than making a down payment on merchandise. In the business world, normal businesses are not required to maintain trust accounts for "unearned income" or variations thereon. The civil remedies are the same, however, for breach: You file a civil suit.

I pay the property manager to manage my property.

Maybe so, but you can't escape that the fact that they are holding your money...and you let them do it.

STG (talk|edits) said:

15 March 2014
Might need to do some investigating of my property manager...

STG (talk|edits) said:

15 March 2014
Interesting link. See the part on comingling of funds, especially the part about using one clients funds for another's expenses. Obviously the law varies state to state, but this might actually be illegal...

http://www.retodayradio.com/Article-AvoidingTrustAccountPitfalls.htm

Ckenefick (talk|edits) said:

15 March 2014
I'll look and even if it is illegal, I still think you're never free from loss in these situations. I mean, look at what Karen's property manager client has done. It's human nature. Just because something's illegal doesn't mean people still won't do it. When your money is gone, it's gone. You're likely never gonna get it back from these types of people, no matter how illegal their acts may have been.

STG (talk|edits) said:

15 March 2014
I understand. It just underscores the need to do due diligence before hiring someone who's going to be handling your money.

Ckenefick (talk|edits) said:

15 March 2014
For sure. Hint: Don't use Karen's client.

I had a Bank CD default when the meltdown happened a few years ago (I think it was Indymac Bank). It was insured, however, and payment came promptly.

Kbairtax (talk|edits) said:

15 March 2014
STG....great link. I am going to give it to my client to reinforce what I have be telling her. Again, she is on board with doing this right. I have to do some poking on NYS trust account law and such to be sure NY does not have some of the more stringent requirements like CA.

No, my client would not be a good one to use....although maybe in another few months!! I think anytime you give over your money to a third party you need to do due diligence....and on a repeated basis, not just at the onset of the relationship.

I think the biggest thing to check is to be sure your manager is bonded......and for how much. And that he renews that bond yearly. Make him send you a copy!

Fsteincpa (talk|edits) said:

16 March 2014
See, can't we just use the $200,000 and then plead ignorance? The only possible improper tax would be the NYS franchise tax.

I had an S-Corp yesterday, receipts were $250,001.47. If it were $250,000 tax is $50, that $1 brings it to $175. Oh well.

Kbairtax (talk|edits) said:

16 March 2014
Fred...That is what got me started on all this. The prior CPA ran all the rents collected as gross receipts. Not as big a deal for the first few years when it was smaller numbers....but when it topped $1mil, then we are looking at a huge jump. I am confident of the leg I am standing on regarding the rent collections not being gross receipts. So I am not fearing NYS for the franchise fee.

I had one last year that was at 1,000,466. What a bite in the shorts to go from $300 to $1000 for $466 dollars. It was a 1099 so there was no getting around it.....Oh well is right. Price of running with the big dogs.

Ckenefick (talk|edits) said:

16 March 2014
I hop you don't intend to show all the property owner stuff on the tax return, seeing that it doesn't belong to Mngt Co.

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