sponsorships to start a business

[oceanlovin'ea]

Client was trying to start a new business and several companies gave her money to pay for advertising and other startup costs. I would consider this income to her business, wouldn't you? Maybe $1000 or $2000 in all.
They are not "investors"...have no interest in the company.

She used the money to try to get the business going. Really had no sales. So only money taken in was from these investors or money she put in.

She set it up as a s corporation. But with no sales and only expenses. I am tempted to file a zero s corp return as the first year in business and the final year. Then put the income and expenses on a schedule C.

Linda, EA

[JoshinNC]

what benefit would these other companies

derive from the payments to your client? were the checks made payable to your client or the S-Corp?

[oceanlovin'ea]

breadkown

3 checks for $2000 were made out to s corp with sponsorship in the memo line. These were from a business so I would imagine that they took a deduction on their business books for this.
2 checks for $530.00 were made out to the owner of the s corp. There was nothing in the memo line. but it was from a restaurant and from a dentist.
1 check from the restaurant was made out to cash for $300.00 with nothing in the memo line.
1 check from an attorney was made for $250.00 and made out to the daughter of the owner of the s corp and memo line says advertising.
All checks were deposited in business checking account.

Mother went online and set up s corporation in her name. She is not the one that is starting the business. The daughter is the one that was trying to get this business going. Daughter's name is nowhere on the s corporation.

Linda, EA

[JohnH]

They did everything else on their own & without any professional help - why didn't they go ahead and file their tax returns as well?

[oceanlovin'ea]

The daughter is the one that actually come to me. Her uncle sent her to me. She had no idea what to do. Her mom set up the s corp and then said here is your business.

Now the mom wants to file her personal return but can't till I straighten out the s corp. That is why I think it will be a zero return.

Linda, EA

[JoshinNC]

What are these businesses

"sponsoring"? This is a cluster. Get a good fee.

[BOB W]

Sounds like a all are gifts except the one where is says "Advertising. On that one it is still a gift and the lawyer will have to deal with it on his own return, unless there was something given in return.

I vote for zero income. All money is attributable to her basis.

If Mom put her name of the 2553, a new 2553 needs to be sent in with the return showing the daughter's name. Change of ownership % is 100% so new 2553 required.

[oceanlovin'ea]

no change of ownership. She is closing the business. It started in 2012 and closed in 2012. That is why I am thinking of doing a zero return.

Daughter has job as pharmacy assistant. No time to pursue this side business.

This is a direct sales home party business. She put on parties and invited people but no one bought anything. She took people to lunch but still no sales. She purchased a product kit. Plus went to a convention. Lots of expenses.

I don't know...thinking out loud. Maybe this should have gone on daughter's return as schedule C. She had all the expenses. Really puzzled on this one.

Linda, EA

[Gretel]

I have a hard time to believe that she didn't sell anything.

[oceanlovin'ea]

well, i just did some research online trying to figure out what she was selling. It is female lingerie and underwear, as it states on the application for the EIN.

This is pretty conservative country. Maybe she didn't know the right people. I don't know. Maybe she is really bad as a salesperson. I know I would be. I couldn't sell ice to an eskimo.

I still think I will do an 1120-s with zeros on it and as the initial and final return. Let state know company is closed. Tell them to close bank account.

I will do a schedule C....just trying to figure out where to do it for mother or daughter. May claim the money she was given as income and offset it with reasonable expenses. For example, she bought about $900 in merchandise. But that is inventory. She will either use it herself or sell it at cost or a loss.
Gets a little complicated. She won't have a profit but I'm not inclined to give her a large loss either.

Keep the thoughts coming. They are helping.

Linda, EA

[JoshinNC]

This is where my thought process was going

Sounds like a all are gifts except the one where is says "Advertising. On that one it is still a gift and the lawyer will have to deal with it on his own return, unless there was something given in return.

I vote for zero income. All money is attributable to her basis.

If Mom put her name of the 2553, a new 2553 needs to be sent in with the return showing the daughter's name. Change of ownership % is 100% so new 2553 required.

I agree with Bob, based on the info provided.

Gifts to her, adds to her basis in S-Corp.

[Matt Sova]

I could use that

I could use an extra $7,600. Could you get me the names of these "investors"?

[mastertaxguy]

S corp: Did it actual do business or was it Schedule C SE all along?

1. This certainly does not look like a "business like"operation.
2. However, since the "start up" contributions were deposited into the S corp bank account, filing an 1120S would, in my view, be the best approach. Report the contributions as basis for the SH (hopefully the daughter but there appears to be some confusion on that), and report her expenses on the 1120 S which probably, from your fact scenario, will equal the contributions (basis) and thus she gets a deduction.
3. Then suggest they dissolve the S corp.
4. There might be some other non tax issues here with the "investors" being upset they did not get a return on their investment or claiming they were misled about the intended business plan.
5. With the daughter's other employment, one might wonder if this entire venture was a hobby as opposed to a business.

[oceanlovin'ea]

daughter was in school last year. Probably thought it would give her income while she was in school and something she could continue for extra income.

None of this was very well thought out, IMO. and now fix the mess I have brought you.

I have put it off till now, just dreading it. Now there is no more time to put it off. Still not sure what I will do. I do see the basis idea. But then mom has a basis of $3080 in a business that is gone. wouldn't that be income to her. Of course there is no money left in the business account. They have used it all for gas and clothes. Don't go there!
It is just crazy to have a business in one person's name and another person doing all the work. Income or losses go to the person who owns the business not the person working the business.

Guess I will just read over all of your helpful suggestions and ideas and make a judgement call that I can live with.

Thanks.

Linda, EA

[BOB W]

Started kit is inventory, not expense. these items can be sold or used personally.......