Client has been operating as a programming consultant, Sch C -- he works for a couple different firms and has been receiving 1099-Misc (when he's been paid). Has done considerable work for another Sch C business (a one-man software company). The unpaid invoices for services rendered are now over $50,000. That company has offered to give some of the business assets to client in exchange for wiping out the amount due. The assets to be transferred are the source code for one program, the domain names, the working website which sells the program, and 2 years of free use of the company server to host the website.
The client does not want the business assets in his name (there has been litigation in the past regarding the product that may not be entirely cleared up), so is planning on forming a Corp to receive the assets.
2 questions:
1) Both businesses are cash basis, so at first blush since no cash is changing hands, no tax impact. But to me this smells of a barter exchange for which client would recognize an amount of Self-Employment earnings, and then allocate that same amount toward asset purchase. Although not the preferred treament, would this be correct? Then would it be the full $50,000, or some potentially reduced amount -- all the assets are difficult to price.
2) Since client never wants to own the assets (fear of litigation) and put them right into a corp, how is this done? Would client need to first form the Corp, and assign his outstanding invoices to the Corp in exchange for shares of the Corp (basically, a reorganization of his biz from Sch C to Corp)? If this would work, then it would be the Corp that would receive the assets in exchange for cancelling the debt. Would client also need to contribute cash to obtain shares of the Corp, or would the contribution of Accounts Receivable be sufficient? I hope I'm on the right track...
Bill
The client does not want the business assets in his name (there has been litigation in the past regarding the product that may not be entirely cleared up), so is planning on forming a Corp to receive the assets.
2 questions:
1) Both businesses are cash basis, so at first blush since no cash is changing hands, no tax impact. But to me this smells of a barter exchange for which client would recognize an amount of Self-Employment earnings, and then allocate that same amount toward asset purchase. Although not the preferred treament, would this be correct? Then would it be the full $50,000, or some potentially reduced amount -- all the assets are difficult to price.
2) Since client never wants to own the assets (fear of litigation) and put them right into a corp, how is this done? Would client need to first form the Corp, and assign his outstanding invoices to the Corp in exchange for shares of the Corp (basically, a reorganization of his biz from Sch C to Corp)? If this would work, then it would be the Corp that would receive the assets in exchange for cancelling the debt. Would client also need to contribute cash to obtain shares of the Corp, or would the contribution of Accounts Receivable be sufficient? I hope I'm on the right track...
Bill
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