Escrow payments by buyer

[Max W]

Client sold his convenience store business (Sch C) for $100,000.  However, escrow had state sales tax lien of $80,000 and a creditor to whom $5000 was owed.

Buyer paid the Sales tax and creditor through escrow in order to close escrow making a total of $185,000 paid.

I take this to mean the seller (client) received the $185K as payment for the business.

Any thoughts?

 

 

 

[Abby Normal]

Agreed that client 'received' 185K and that it's all income.

JE to pay off liabilities in DR liabilities and CR other income.

[Max W]

2 minutes ago, Abby Normal said:

Agreed that client 'received' 185K and that it's all income.

JE to pay off liabilities in DR liabilities and CR other income.

Yes. The $85K shows up as the total in the debit column and the $85K shows up as a CR as Bal Due Escrow after the subtotal of $100K.

[Medlin Software, Dennis]

Interesting situation.  Since most purchases are assets only, it may be the buyer's perspective the price was 185k, since they likely care not about the sales tax lien, and may only care a little about the creditor (if it is a key supplier they also want to use).  May have some sort of off sale license to account for separately, depending on the situation.

[Max W]

1 hour ago, Medlin Software said:

Interesting situation.  Since most purchases are assets only, it may be the buyer's perspective the price was 185k, since they likely care not about the sales tax lien, and may only care a little about the creditor (if it is a key supplier they also want to use).  May have some sort of off sale license to account for separately, depending on the situation.

Yes, indeed.  It is interesting.  All the escrow items were repayment of taxes, loans, sales commission. creditors and escrow costs.  No Assets.  Some equipment was sold prior to escrow and the liquor license must have been a side deal, as well.

The client will be able to deduct most of the taxes, except for some $30K of FTB income tax as that will be limited to $10K on Sch A and he won't be able to deduct about $20K in loans.

 

[Medlin Software, Dennis]

Yikes.  Sounds like the new owner bought a job, and one that likely has not been paying well.

[Abby Normal]

1 hour ago, Max W said:

The client will be able to deduct most of the taxes

The only way sales tax can be deducted is if it was previously (and foolishly) included in sales.

Or was your post wrong about it being sales tax?

[Max W]

11 hours ago, Abby Normal said:

The only way sales tax can be deducted is if it was previously (and foolishly) included in sales.

Or was your post wrong about it being sales tax?

No, it is not wrong.  The client never remitted the sales tax that had been collected to the state sales tax agency. So, he was audited for 3 years and they came up with the $80K.  

[Abby Normal]

11 hours ago, Max W said:

No, it is not wrong.  The client never remitted the sales tax that had been collected to the state sales tax agency. So, he was audited for 3 years and they came up with the $80K.  

In other words, the 80k was wrongfully included in sales, because it was deposited to the bank account but not properly recorded as a liability. That means the losses they reported on Sch C were off by 80k, and returns should be amended. Some of that 80k is probably penalties and interest.

This is why I don't like to do Sch C's without a balanced set of books.