Tax Reporting / Splitting

[rfk]

A question regarding the following:

My client had a short period, maybe six weeks, of non-committal partnering with another individual for business purposes.

My client was the person who started the business last year and made it a going concern. They agreed to do this business together, but their personalities did not make it work. They had no formal agreement, only oral. The other person had contributed about $14,000 during the initial phase, for inventory purchases, so I am wondering how to have my client not have to pay the portion of the other person's taxes on the potential profits derived from the sales of this inventory.

Therefore, how should my client provide the other person the necessary paperwork, so that each reports his portion of the profits. I am stumped about this.

Thanks for your help.

RFK

[Bees Knees]

The technically correct answer is to file a 1065 as a partnership and allocated profits to each on a K-1.

[rfk]

Thanks Bees

Thank you for the advice. Do you think that there is any other legitimate alternative?

RFK

[taxea]

Tax Reporting / Splitting

Bees Knees is correct the partnership return creates the K-1 for each partner. If your client continued the business without the partner then the partnership return income/expense should be alloted to reflect these items for the period of time that the partner was involved. What happened to his 14K? Did your client disolve the partnership when the partner left? If he did you can file a Sch C for the balance of the year so that the partnership return only includes income/expenses during the partnership relationship.

FYI you should always be sure that the partners have a written agreement as to % of each partner, etc.taxea

[rfk]

TaxEA

taxea:

They are closing the partnership now; just waiting for the end result of the returns and items that affect the "situation." They did this without my knowledge in regard to setting up the partnership, so I had no say in what had transpired. This is after the fact. The $14K went into the business for purchasing inventory for resale. Waiting for final results.

Bottom-line, it looks like a partnership return and K-1's once the partnership finishes with the administrative part of it.

RFK

[JohnH]

You'll be wise to get paid for the partnership return up front as well (or for more than one return if the shutdown spans two years). I have a feeling that when these two divide up the loot after the "final results" are in, nobody will be willing to pay for the return prep since that's just a dead cost to both of them.

[erchess]

Big Question

I am sure I could work out the profit or loss and the separately stated items of the partnership from the books and records of the guy who was doing the work. But assuming that one contributed a given sum of money and the other contributed labor and perhaps a sum of money (larger smaller or the same as the other guy's) then what is an equitable split of the outcome? And wouldn't the tax professional have to tell the parties to work that split out between themselves or with someone else as mediator since only one of the two is the TP's client?

As an alternative to the partnership could filing the business as a Sole Proprietorship operated by our client that took out a loan from the other guy be defended? Then all you would have to work out is a repayment arrangement or am I mistaken?

[JohnH]

I think informal partnerships are considered evenly divided by default unless there is some agreement to the contrary. Maybe I need to be corrected on this.

The idea of considering it a sole proprietorshp with a loan is interesting, but without prior documentation I'm not sure it would be a good idea to be in the position of coaching these two to redefine the arrangement after the fact. Especially since they've already said they don't get along well. That could come back to bite you.

[taxea]

John H is right to say an informal partnership is considered 50/50. I was not suggesting that a written agreement be done after the fact but rather as a caution to the client should he partner in the future.
Looks like you need to do a partnership return for the full time the business was active since your client did nothing to dissolve the partnership at the time that the other party left.taxea