I recently acquired a corporate client (C Corp.) who buys residential real estate, fixes it up and resells it. His previous CPA put most of his operating expenses (property taxes, mortgage interest, sales expenses, etc.) into the general & admin. section of the P & L. Last year (2005) he had to change accountants and the new one put all that into cost of goods sold. Needless to say there is a vast difference between the gross profit sections of the 2004 and
2005 returns. What is the preferred way (that will make IRS happy) of reporting these expenses? I tend to side with the first accountant who specialized in this area. Both accountants showed the property assets in "other assets" on the balance sheet. I would treat this as inventory since that is what it is. I guess my manufacturing background is coming out. Is there a reason it is not shown in inventory? Also my client is buying property to flip in Texas. He plans to hold it for a while until the market recovers to a level where he can recover his costs and make a profit. If he rents the property out for the convenience of his company while he is holding it, does he have to take depreciation? The property was acquired in the normal course of business and will be sold at an appreciated price. The rental is just to get some income to cover costs while it is being held. Linda Dorfmont E.A., CFP, CSA