Need help with Accounting treatment for S corp that flipped a house

[klundyacct]

I have a friend (it’s really a friend;) ) who has an S Corp that does a variety of services but mainly does laundry and cleaning services. She is the sole owner and is always taxed that way through her personal return.

This year, she purchased a house to flip with some excess cash she had. The purchase price was $40k and about $43k to renovate it, making the total cost about $83k. They flipped the house and put it up for sale and they have an offer that should close in Jan 2020.

This is a cash based business. Right now, on her books – she has the $83k in a Construction in Process account because the house is not sold until Mid-January. So, on her books she is basically showing $80k more in profit than she thought. My question is – is this treatment of the purchase and renovation expenses correct? I think she was thinking it would all be expensed and her profit taxed upon the sale but based on what I read, that CIP is a holding account for her basis until the sale.  Her concern is that her profit in 2019 is $80k higher than she anticipated and she's concerned about taxes for 2019.

[klundyacct]

I just want to add that they don't normally flip houses and they don't intend to do it again. Its not a normal business activity.

[Critter]

Your friend really needs to seek local professional help to get their books in order ... the house and the expenses to fix it up  are considered part of her inventory ... it is NOT deductible on the 2019 return ... instead it is part of the cost basis of the property and will be used on the 2020 return when the home sells.  

[Anonymous]

her accounting is correct. the CIP account (an asset of the S-Corp just like money the Corp has in its bank account ) holds the $83K she spent.   It is not deductible until the property is sold.   It's too bad her profit is $83K more than she expected. but she like many other taxpayers should have made inquires about what the tax consequences would be when they are unfamiliar with the tax laws in their situation.         

[Hal_Al]

"They don't normally flip houses and they don't intend to do it again."

That means the house flipping activity is not part of her business, or even a separate business.  The $83K is not business expenses nor "cost of goods sold" (or to be sold). It is the cost basis of a capital asset.  When the house is sold (presumably in 2020), she will report it as a capital gain or loss, not business income. 

[Critter]

Depends on who bought the house ... if the S-Corp did using company funds then it goes on the S-Corp return and if this was flipped in less than a year then it is inventory.  Otherwise it is a capital asset.  

[Anonymous]

even if this was done personally rather than the S-Corp the tax consequences would be the same.  the $83K would not be deductible until she sold the property.