The boy's in a band - New Client

[Val_Matt]

Taxpayer's 20 y/o son is a full-time college student and has a band. The taxpayer claims the son as a dependent on his return. The taxpayer had been acting as the band manager until the son came of age and 1099's were issued in the taxpayer's name. The band is profitable, but has been shown as a loss on the taxpayer's last two returns due to depreciation and mileage.

I am reluctant to keep the band on the taxpayer's return again for concern that the business losses may be disallowed because of three year's consecutive losses (again because of depreciation and mileage) and reclassified as a hobby.

In 2014, the band did pretty well and 1099's were issued in the band's name. I want to do a return for the son with the band losses on this return (he's still a dependent on the taxpayer's return). The losses weren't as bad this year, as they are starting to become more established.

Does this sound like the best way to approach this?

Thanks in advance for your thoughts.

[Roland Slugg]

You can't simply move income between different taxpayers based on where it is most (or least) needed or wanted. Income and related costs and expenses must be reported on the tax return of the person who earned it, or in the case of property or a business, on the return of the person who owns the property or business. If it's the dad's band, and the income was paid to him and reported to him on forms 1099-MISC, then that income and the related expenses must be reported on his, not his son's, return.

If dad, in turn, pays some of the gross income to his son, then he (dad) can deduct that and son would report the same amount on his (son's) own return. The son may also deduct his own mileage as well as any other expenses he incurs and pays. If he does this, he should use Schedule C or C-EZ.

[JohnH]

Bet they're not reporting their tips - unless they're a really bad band.

[Nashville]

Whose Dog is it Charlie Brown?

You can't just minimize tax effects by moving income around amongst family members. I would, however, look for a way to
break the precedent of reporting for the father if his role is reduced in managing the band.

I'm assuming at some point, the booking of venues, determination of payments to band members, insurance responsibility, etc.
will be taken over by the son from the father. When this happens, I believe it will become reportable on the son's tax return.

Remember that depreciation on the equipment can only be taken by the party who purchased the equipment, unless the
equipment is gifted or sold to the son. If it has been gifted, son may continue depreciating with his fathers basis at the time
of the gift. If it has been sold, he can depreciate it at the value he actually paid (or FMV if less).

Transferring the reporting to the son can be done, but all the hoops must be jumped through properly. You can't just first
measure the tax benefit under both scenarios, then pick and choose each year.

[Val_Matt]

Transferring the reporting to the son can be done, but all the hoops must be jumped through properly. You can't just first
measure the tax benefit under both scenarios, then pick and choose each year.

Sorry for the confusion. I'm not looking to shift income/loss where it's needed. I want to remove the business from the father's return, as the band is now finally run by the son. My concern is the continuing operating loss due to the depreciation and the possible reclassification to a hobby.

[kathyc2]

In 2014, the band did pretty well and 1099's were issued in the band's name. I want to do a return for the son with the band losses on this return (he's still a dependent on the taxpayer's return). The losses weren't as bad this year, as they are starting to become more established.

If the 1099's were issued in the band's name, what is the EIN? If the EIN is attached to fathers name (as a sole-proprietor with an EIN) I'm not sure you can just put them on a different return.

Actually if sole proprietor, 1099's should have been issued to Dad, d/b/a Band name. If they were just to the band, issuer will likely be getting a mismatch notice.