How would you handle this?

[RightOn]

Taxpayer wanted to retire from a business. His friend wants to take over to run it. The friend will take all the income and responsible for all the expenses. He will pay $1000 to the taxpayer each month. But everything, include the business license, the utility bills, insurance bill, etc, will still be under the name of the taxpayer because he is still the owner of the business. Taxpayer will pay for all these bills first and then the friend will reimburse him. Taxpayer is also the owner of the commercial space.

How would you handle the situation? The most basic question is: does the taxpayer report the $1000/month income on a Schedule E or a Schedule C? I am thinking it should go to a Schedule E since it looks to be payment by his friend to rent the business or the commercial space.

[appelman]

Schedule C seems safest

Otherwise, you can be considered as evading self-employment tax. I would report everything received from the new owner as gross income, including reimbursements, and then deduct all the expenses paid. Even if he is "renting" the business, Schedule E is ONLY for real property rental.

[BOB W]

Taxpayer wanted to retire from a business. His friend wants to take over to run it. The friend will take all the income and responsible for all the expenses. He will pay $1000 to the taxpayer each month. But everything, include the business license, the utility bills, insurance bill, etc, will still be under the name of the taxpayer because he is still the owner of the business. Taxpayer will pay for all these bills first and then the friend will reimburse him. Taxpayer is also the owner of the commercial space.

How would you handle the situation? The most basic question is: does the taxpayer report the $1000/month income on a Schedule E or a Schedule C? I am thinking it should go to a Schedule E since it looks to be payment by his friend to rent the business or the commercial space.

Situations like this generally go bad for the true owner of the business. The True owner is responsible for all debts, including sales tax, income tax, etc. Assets have not changes hands and the "friend" is responsible for nothing, legally.

I would re-think how this could be structured better. But the responsibility needs to be taken off the true owners shoulders. How about an installment sale?

[Kram BergGold]

How I see it

If your client goes through with this as you describe, then I agree with appleman with one addition. The friend is an employee and gets paid on a W-2.

[RightOn]

Otherwise, you can be considered as evading self-employment tax. I would report everything received from the new owner as gross income, including reimbursements, and then deduct all the expenses paid. Even if he is "renting" the business, Schedule E is ONLY for real property rental.

Good advice, I didn't think about the self-employment tax issue. I agree it's more advisable to report it on a Schedule C so self-employment tax will be paid.

[RightOn]

Situations like this generally go bad for the true owner of the business. The True owner is responsible for all debts, including sales tax, income tax, etc. Assets have not changes hands and the "friend" is responsible for nothing, legally.

I would re-think how this could be structured better. But the responsibility needs to be taken off the true owners shoulders. How about an installment sale?

I also agree. However, that's the way that the taxpayer and his friend prefer. I have already cautioned him on the liability issue. But I guess now it's up to him to decide whether he wants to take my advice or not. He and his wife have clearly been informed of the possible liability consequence.

[RightOn]

If your client goes through with this as you describe, then I agree with appleman with one addition. The friend is an employee and gets paid on a W-2.

Well, the friend is going to run the business by himself and the taxpayer will have absoultely no control or influence on however and whatever way that he chooses to operate the business. If there is any tax statement to be issued, I think it will be more like a Form 1099-misc. Do you think so?

[Lion]

Owner

Sounds like the taxpayer still owns his business but has hired a manager to run it while he retires from the day-to-day operations.

[erchess]

I've never fired a client

but if this guy persisted in this course of action, I'd think seriously about firing him. I'd be concerned about possibly getting blamed if things went bad.

I'd want him to do set up a limited partnership where he is the limited partner and the liability beyond loss of the business assets would be on the friend. In the alternative I'd want him to sell the business to the friend. In fact, I'd prefer that option.

As to the financial terms, the client here is contributing an existing business and all that goes with it including goodwill and all the equipment and the friend is contributing labor and possibly expertise. I would want a third to half of the profit if I were the client.

[Corduroy Frog]

Hazy and Dangerous

that's the way that the taxpayer and his friend prefer. I have already cautioned him on the liability issue. But I guess now it's up to him to decide whether he wants to take my advice or not. He and his wife have clearly been informed of the possible liability consequence.

Aside from the fact that this is a poorly planned arrangement where any number of problems can arise, there has got to be so much of an ownership question that the preparer can't really sift through this. If there is in fact going to be a transfer of ownership, why don't BOTH parties file Form 8894?

I think BOTH of these guys are going to lose a friend before this plays out.

[BHoffman]

Sounds like the taxpayer still owns his business but has hired a manager to run it while he retires from the day-to-day operations.

Completely agree with Lion.

And agree with Bob W - your client is surely going to get screwed. (Bob put it more nicely.) It's just a matter of degree. How much of a business are we talking about? Is it very profitable? How much risk is there to your client?

Perhaps your client should talk to his attorney about this.

[oceanlovin'ea]

Afraid of this one

I would be so afraid of this one, too. Afraid for both the business owner and for you, RightOn, if you are the preparer of the return.

This man has apparently had this business for quite a while. But sometimes people are only looking at it from one prospective and they don't understand the tax implications of doing things like this.

Maybe you could walk him through some different scenarios of what could happen and what would be the result for him. Put numbers on paper and make him look at the results.

Linda

[AJsTax]

Still active

Taxpayer wanted to retire from a business. His friend wants to take over to run it. The friend will take all the income and responsible for all the expenses. He will pay $1000 to the taxpayer each month. But everything, include the business license, the utility bills, insurance bill, etc, will still be under the name of the taxpayer because he is still the owner of the business. Taxpayer will pay for all these bills first and then the friend will reimburse him. Taxpayer is also the owner of the commercial space.

How would you handle the situation? The most basic question is: does the taxpayer report the $1000/month income on a Schedule E or a Schedule C? I am thinking it should go to a Schedule E since it looks to be payment by his friend to rent the business or the commercial space.

The taxpayer will pay the bills first and then be reimbursed? So he will be doing all that office work. Then he will still be active in the business. 2 persons engaged in the same business have a partnership, whether they want one or not! Better get a lawyer to write up the partnership agreement, starting with the exit plan because that will be needed soon.

[BOB W]

I think it would be helpful to know what type of business this is? Some types of businesses are easy to manage; others require years of experience. The answer makes no difference on my posistion that it is a BAD relationship. It is just to determine how fast it is going to go bad and how much it will cost the true owner.

What experience does the new operator have?????? and the questions can go on and on.
The new operator needs to have some money at risk, although that may not matter if the rewards are greater than the risk.

[Davc]

I think it would be helpful to know what type of business this is? Some types of businesses are easy to manage; others require years of experience..

And some businesses require a license that perhaps the friend is unable to get? Such as a liquor license.