The Beach House and the Corporate Taxes
We never expected that the reconciliation of the settlement statement on our client’s purchase of a vacation house would lead to saving $21,000 in corporate taxes. But that is precisely what happened when we discovered that an escrow refund was erroneously treated as business revenue.
As we have seen, tax savings are often found where they are least expected. Case in point: we saved a client $21,000 in corporate taxes from, of all things, analyzing the HUD-1 closing statement on the purchase of a vacation house. How does buying a seaside cottage result in saving business taxes? It’s all in the reconciliation.
Our new client, the owner of a successful art gallery operated through a corporation, utilized a rudimentary system for tracking his revenue and expenses. Every year he downloaded his business checking account activity from his bank’s website into Excel. He emailed the spreadsheet to his CPA who organized the data into a simple Profit & Loss statement from which the corporate tax return was prepared. When the client retained us we immediately replaced the Excel scheme with formal financial accounting using Quickbooks. We took over both the client’s personal and corporate accounting. The tax returns for the previous year had not yet been filed and we reconstructed the entire prior year’s financial activity.
Among his prior year transactions was the purchase of a second home in Malibu. We record all activity pertinent to property acquisitions through an escrow account in Quickbooks. Ideally, when a transaction closes, the escrow account should zero-out. In this instance the escrow showed a $45,000 balance that matched a refund due the client per the HUD-1 settlement statement. But our client’s personal bank accounts showed no such deposit.
After some digging we discovered that the $45,000 refund had erroneously been deposited into the corporate checking account. Our art dealer’s business revenue was thus overstated and had this error not been detected, the client would have overpaid his taxes by $21,000. Reconciliation once again saved the day.