huge loss on business

[Possi]

I have a client coming in this evening and I know he will have huge losses on a business he tried to run last year.
The business is a sole prop barber shop. He wasn't able to collect rents from the people using the building and closed after spending lots getting this off the ground (fixing the building up, getting the proper paperwork done, etc.)
Since the business opened and closed in the same year, there will be no depreciation taken, but it will all be expensed in the same year.
I will put all the expenses on the Sch C, where there will be very little income.
I guess I am concerned about these losses.
Is there need for concern that Sch C losses might really be bad debt losses since he wasn't able to collect on rents?
I think I'm borrowing a headache that I really do not need to be concerned about. It is a Sch C loss and a big one at that. But it is what it is.
Any chatter on this?
Thanks for any input from "my people!"

Blessings,
~possi

[DaveO]

Failure to collect money is not a bad debt unless the income was accured in a previous year, unlikely for a "C". Even so wouldn't a rental business be reported on "E" unless you are talking chair rent.

[gman]

Losses

I have had small business take losses for many years, and I warn them every year about being audited and hobby rules. They have done it for so many years, I think they are tired of hearing me. Audits are extremely rare, and most of the clients losses are under 5000.00 so unless the IRS tells them otherwise, they will continue. I check expenses and all documentation appears to be there, so on we continue.

[Nashville]

Whoa on Depreciation

You did say you weren't going to take depreciation, but in the alternative you said you were going to deduct everything.

Does this mean you're going to deduct what he paid for equipment? Hope I've misread you, Possi lady - these are investments in business property and if you are not going to depreciate them, they can't be deducted until disposed. 4797 stuff.

[Possi]

depreciate?

You did say you weren't going to take depreciation, but in the alternative you said you were going to deduct everything.

Does this mean you're going to deduct what he paid for equipment? Hope I've misread you, Possi lady - these are investments in business property and if you are not going to depreciate them, they can't be deducted until disposed. 4797 stuff.

The business is closed. I'll find out tonight how he disposed of the equipment.
Start up costs were also incurred. I can't depreciate anything if the business opened and closed in the same year. See my dilemma? There will be a lot of expenses that I can't depreciate.

[Possi]

Sch C or E? No Depreciation! YAY

My client came in and this isn't as bad as I envisioned.

He LEASED a building. It was a barber shop. He paid rent to the owner, and did repairs.
He leased all the furniture.

He received rent from 2 barbers for only 8 months before the whole thing bombed. The lease was up and he walked away.

So, my new question is this:

Is this truly a Sch C or is it a Sch E? I think it is a Sch C.

Thanks!

[DaveO]

Assuming that he is a barber and was doing chair rent then it all goes on "C".

[Possi]

Not a barber

Assuming that he is a barber and was doing chair rent then it all goes on "C".

He is not a barber. He leased the building, fixed it up, leased furniture for it, and "sub-let" the spaces.

I am inclined to think he was in business and put it on a C. Do you agree?

[taxmom34]

i may be wrong

but wouldnt he have to own the building in order to use schedule E?

[DaveO]

Providing substantial personal services is what changes passive rental into self employment income. If he is not renting as a part of his trade or business I would lean towards the “E”. If you rent space to vendors but provided no services to them I would report on “E”. However if you run a flea market and rent booths collecting sales tax and perhaps a percentage of the proceeds and selling items in the absence of the rentor than I would put that on an “C”.

I don’t think the fact he is subletting really matters as long as the activity is rental not a trade or business. Rent is money received for the use of property.

[Possi]

Owning the building?

Providing substantial personal services is what changes passive rental into self employment income. If he is not renting as a part of his trade or business I would lean towards the “E”. If you rent space to vendors but provided no services to them I would report on “E”. However if you run a flea market and rent booths collecting sales tax and perhaps a percentage of the proceeds and selling items in the absence of the rentor than I would put that on an “C”.

I don’t think the fact he is subletting really matters as long as the activity is rental not a trade or business. Rent is money received for the use of property.

He doesn't own the building, but he did provide the furniture, albeit leased furniture, so maybe he did provide for the renters??

I think looking at the forms themselves, the C looks more compatible to his business. Especially since there is no building to depreciate as rental property.