crazy question

[oceanlovin'ea]

An old ( as in not recent client) client came in and asked about a situation he created.

Man wanted to help step-son get restaurant started in another state. But son doesn't have good credit so couldn't get lease in his name.

Lease for restaurant is in MOTHER"S name. So is occupational license. But she lives here and has nothing to do with restaurant. They also ended up spending about $30,000.00 in total to get equipment repaired or replaced, etc. So mother has invested $30,000. in the restaurant. Hopefully some day son will be able to repay them. (not likely as he has large family to support).

Son runs the restaurant and has an accountant that he has hired to take care of business bookkeeping. Son gets a weekly check. No taxes being taken out.

Who has to put this business on their tax return? Mom who actually owns the business or son who is running the business?

I ask this question because of past experience with him. When I first met him, I started doing bookkeeping for him for a restaurant. Did this for a while....paid son salary,etc. Then I found out that everything in the business was in the son's name. Step father was only helping him get the restaurant going. Had to make many changes. Can;t pay yourself salary on sole prop.
But this is different because son is working business and mom only invested in it.
I am sure he is a sole prop.

Any ideas???

Thanks
Linda

[DaveO]

The mess people create for themselves.

I'd say they have formed a partnership and he is getting guaranteed payments. Any remaining income would belong to mom. Has an EIN been obtained? Are there other employees? They should file as an LLC to tidy up the legal biz.

[solomon]

I would consider the son as the beneficial owner and report income and expenses on his tax return.

[oceanlovin'ea]

moving back to top

I wanted to move this back to the top to see if I get any other ideas on this situation.

I appreciate your responses.

Linda

[erchess]

Two Smart People

Dave and Solomon both know more about taxes than I do. I personally think that there are three ways this could be done.

Son could be the owner and Mom has loaned him money possibly on a handshake basis. If he has not created any other entity he is a SP and the money he takes out of the business is drawing. My understanding is that she has to charge him interest and that since he is a related party the interest is taxable to her even if unpaid unless she takes collection actions that mothers do not ordinarily take against their kids. This is rough on Mom.

Son could be the owner and Mom has gifted him money. Mom has to file a gift tax return and if they started the business in 09 then her return is late and therefore I believe subject to penalties even if no tax was due. This is also rough on Mom.

Mother and son could be in business together and unless they want to pay a lawyer to do something else for them then they are as Dave pointed out a partnership. I personally think they should incorporate but not all clients will do that. I think they could retroactively incorporate but I could be wrong. This is easier on Mom right now but harder if the partnership gets in trouble because she could be liable for its debts.

[BHoffman]

Linda - I'm going to agree with solomon. I don't think the IRS will care whose name is on the license or the lease. Not sure about how the State is going to look at this, however. Your client might be in trouble with the liquor licensing folks but that would be an entirely different matter.

Also, I have seen a few times where a sole proprietor and/or a partner have taken payroll checks and that never seemed to cause any problems.

[JohnH]

They could prepare a simple sub-lease agreement to be sure his lease payments are deductible with no question and to keep everything neat. (Even if the agreement has a 'no sub-lease" provision, I doubt anyone will care).

If there were an interest-only note for the $30K, backdated to the date of the loan, then the Applicable Federal Rate has been so low for the past couple of years that the interest won't amount to much. And unless there are other gift tax issues, the mom could just forgive the interest payments (although it might be better to swap checks).

That would leave the licensing issues, which may or may not be a big deal as has already been pointed out.

And sonny can just figure out how to come up with the S/E tax on his draws from his sole proprietorship. That's the least he should be expected to do.

[taxxcpa]

Salaries vs SE

Also, I have seen a few times where a sole proprietor and/or a partner have taken payroll checks and that never seemed to cause any problems.

Paying salaries to partners and sole proprietors does not cause any problem whatsoever. I even had a client who did so get audited and this was not even mentioned by the auditor.
Technically they should do it with Schedule SE, but why quibble? Things equal to each other are equal to the same thing.