Taxation of a loan business-I'm Stumped

[Harvey Lucas]

Extremely Helpful

All of your posts have been extremely helpfull, thank you so much.

If I can call the activity "investment", then I would put all the trailer sales on schedule D, and thereby electing out of 6252 reporting. I would do this because the actual profit on the sales are usually very little. Reporting the profit all up front on Sch D avoids all those pesky 6252 forms year after year.

Most of the profit comes from the interest collected on the notes.

When I started with this client my conclusion was "investment activity", however, then he went and became more and more "business like", ie, advertising, rented an office, etc, etc.

If it looks like a rose, call it a rose..in this case, it really does look like a business. (even thought I wish it didn't)

Based on his activity as a whole, I am more comfortable putting in all on Schedule C.

I'm still having a really hard time wrapping my head around the idea of "the interest income" on Sch C? If I put it on Sch C, won't IRS be looking for it on Sch B?....Should I list it all on Sch B, and then make a negative entry for the total amount with a description "amount reported on Sch C"?

Snaggletooth, you stated "interest earned in the course of business would be considered self employment income and reported on Sch C"....does it say that somewhere that I could read?

Thank you again everbody, hope you all had a great holiday weekend.

Harvey Lucas

[Kram BergGold]

How I would handle it

First, I would find out if you can form an LLC for an investment. I do not believe that you can. My reasoning is when you form a single member LLC you report the income on Schedule C or E unless you elect corporate status. I have never seen where you can report the income on Schedule B and D. If I am correct, then assuming the clieint did not elect corporate status the income goes on Schedule C, he has inventory, and no installment sale treatment.

[Burke]

Under the facts and circumstances you describe, I have no reservations at all about this being a Sche C business with the mobile homes treated as inventory. It is clear from his activities, regardless of the fact that he has another job -- W2 or not. Especially when you say he gets some of them free! The time it takes to fix them up is immaterial. He is buying them for resale, like any retail business. And if you investigated your state rules, he may even be required to collect and pay sales taxes on them.

[joanmcq]

I vote for Sch C & inventory. You can have an investment club type LLC, but if he is advertising, holding himself out as a business, renting an office, etc, it seems like he intends to make it a business like any other loan business. It sounds like a version of the used car 'pot lot' where cars are bought cheap, fixed up, but the biz makes a lot of cash 'holding their own paper' or, in other words, high interest loans.

[BOB W]

Just a quick note >>> Schedule B & IRS matching would not exist here because the buyer will not be issuing a 1099INT.................

[Harvey Lucas]

Joanmcq, under your car lot example...when the car lot "holds their own paper" at high interest rates...the interest they collect is included on Sch C along with the cars sold as gross income?

BobW, SchB & IRS matching is an issue in this case because he has a note servicing company handle the collections on all the notes. They do issue a year end 1099INT...the 1099INT forms show my clients SSN and the name of his LLC.

It is an unusual and perplexing situation...ie...if he were buying regular homes, ie, conventional real estate, and then sold the homes and carried the contracts himself it seems very clear to me that the collection of the interest in that case would go on SchB. This would be the case even if he did advertise to buy homes, or sell homes. That sort of activity is very common among real estate investors, even if they buy and sell a few homes per year.

Possibly I need to think of the activity as two seperate activities, ie, Activity 1, he buys and sells, or buys, fixes and sells mobile homes and he has a profit or loss from that activity that goes on schedule C.......Activity 2, he sometimes finances the buyer and holds the paper himself and that activity is investment, ie, Interest goes on SchB.

The client himself really has no idea as to the taxation of his activity. He formed the LLC for liability protection and has left it to me to decide how it all should be taxed.

Harvey Lucas

[joanmcq]

Y'know I'm not sure how the car lot would handle it. If not an SP or SMLLC, of course the question would be moot. But shouldn't the 1099-int come in his LLC's name and EIN? It seems if the main business is financing, then the income is SE. But I am talking off the top of my head; I'm wondering if anyone out there has car-lot clients that could clarify the accounting end and whether the interest income is kept as interest or is ordinary income..ie, if the entity was a multi-member LLC, would the interest be business income or portfolio? Would it flow to the Sch E, or the B?

[Black Bart]

Interest on notes.

The problem I am having is that the activity looks like a business to me and as such maybe should all go on Schedule C...Is it proper to report the collection of the interest income as gross income on Schedule C?

An interesting, somewhat rare (it's come up a few times before over the years) question that never seems to get fully settled (I've never yet seen a cite). Here's my two cents' worth: The trailer sales should go on "C" (because of his "activity") and the interest should go on "B."

At first glance it seems like the interest should and would be Schedule C income because it's money "earned" in the course of doing business, but...I once had a similar problem on a different form. A client quit his W-2 job and went to work full-time managing his dozen residential rentals. A smart guy and good handyman, he did all his own paperwork & repairs. Busy as a beaver, he actively managed the place almost around the clock, leading me to ask: Was this a business "C" or a rental "E"? I posted the question here and someone told me that those rental fees were for the "use of the room" (rental income) and were NOT payment for his work, which was an unpaid secondary activity occuring incidentally to the rentals (he wasn't doing SE work "for" the tenants).

I think the same principle applies here: While he is enabled to acquire the interest because he's in business, it's not being paid to him for something he is doing in the business. The interest is payment for the "loan" (carrying the note) of the money; that's its primary purpose -- therefore, Schedule B income.

[Davc]

From page 5 of the small business pub: "Interest received on notes receivable that you have accepted in the ordinary course of business is business income." Schedule C.

States will also frequently consider such interest as "sourced" income.

[Black Bart]

Aw, shoot!

From page 5 of the small business pub: "Interest received on notes receivable that you have accepted in the ordinary course of business is business income." Schedule C.
.

And I made such a good case too -- only to be thrashed by an upstart three- line post. Besides, what does the IRS know about such fine-tuned, high-toned dealin's (Bees once said that IRS publications are not the regulations)?

But in any case -- Davc, you may consider yourself to be on my smart alecks that know more'n me list.