How to report commission split with out-of-state S-Corp

[TXBroker]

I have a friend in another state that wanted to transact in TX, so he asked if I would be the broker on his deals. 

I have a personal brokerage license. I am an out-of-state broker, so I just get a small commission on deals and my friend who has an S Corp gets most of the commission. 

For example: I have done two transactions in the last year. The total brokerage commission for the two deals was over 240k. Yet, my portion of the commission was only 15k. So I am showing this massive income and also a massive expense, which increases my chance of being audited by 10 fold. 

I need to know how to show this on my taxes. I am not really making a lot out of these few deals. 

[PatriciaV]

Please clarify what type of tax return you are preparing. Are you a member of the S-Corp? How was the commission income reported to you?

[TXBroker]

I am filing a Home and Business tax return. 

My friend Steve is the owner of the S-Corp COBE Development. The company has a real estate broker located in Arizona.  

I am the owner of American Home Realty LLC, I am the only person in the LLC, and I am a real estate broker located in Texas. 

When Steve's company has a commercial real estate listing in Texas, he lists the property through my Texas broker's license. We have an out-of-state brokerage agreement. 

Steve's company does all the work, and they get the lion's share of the brokerage commission. 

In 2021, there were two Texas transactions that went through my brokerage license.  The brokerage fees totaled around $260k ($130k per transaction in broker fees). I (American Home Realty) only made $15k ($7.5K per transaction). COBE development got $245k in brokerage fees of the $260. 

But because the entire fee gets wired to my bank account (American Home Realty), and then I keep my $7.5k per transaction and wire the larger $122.5K per transaction to COBE Development, from a tax perspective, it looks like I took in $260k in revenue and had $245 in expenses. The reality is, I took in $15k in revenue and had no expenses except those associated with wiring the $245k to Steve's company. 

Hence, as I fill out my tax in Turbo Tax, it is saying that because I show more than $100k in revenue, I have a very high chance of being audited. 

So my question is, do I need to show the full $260k in revenue and full $245k in expenses or can I just show the $15k in revenue and the $25 dollar wire fee for each transaction? If I can show the revenue and expenses this way, I am sure that my audit risk would go way down. I have nothing to hide, but I don't want to deal with the hassle of an audit. 

Because Steve's company, COBE Development is an S-Corp, I know that I don't need to send him any tax documents.  

[TXBroker]

@PatriciaV , do you have any recommendations?

Or does another tax expert?

[Rick19744 · Accepted solution]

You don't have any other choice.

1099's are not issued to S corporations, so I would make sure you retain a copy of either the EFT / wire documentation.   I would also recommend you get a W-9 from the S corp to support the position they are an S corporation.

As a result of this, you need to make a decision if the risk of a potential increase in an IRS audit, is worth the commission you are receiving.  

You should also get some type of documentation that supports this transaction; formal agreement from the S corporation signed by all parties.

The IRS is not a fan of netting transaction detail, so I recommend the gross method. 

I don't know how this fits into your overall tax situation, but I would maintain the records to support this transaction for 7 years.

[TXBroker]

Yes, I have documentation of the wire transfers and signed documentation by all parties on the deals.

Thank you for the recommendation, Rick!

[Rick19744]

Welcome