Cosmotologist Chair Rental

[mcb39]

A long time client of mine has always rented a chair in an established salon and reported her business as SE which is proper.  NOW, she has purchased the business from the lady who she rented from.  She does not own the building, but has purchased all equipment and "blue sky".  There are several other stylists, etc working in the same building.  They will now be renting chairs from my client, who has to pay all of the overhead for the building; rent, utilities, etc. 

 

My question is:  Now that she is collecting rent for the rest of the chairs, is that SE income subject to SE tax, or is it rental income for schedule E?

 

Thanks for any guidance here.  She just took over Oct 1 and we just finished changing all of her licenses, etc.

[Lee B]

In the past, I have considered it to be SE Income because my clients were renting personal property plus providing services i.e.,

Receptionist and phone,  Janitorial Services, Merchant Card Services, Advertising etc.

[mcb39]

In this salon, each girl has her own phone (cell) and that is the number she gives her clients.  They each have their own business cards and nobody has a credit card machine unless they want to pay for it themselves.  My client always had her own cc machine until now.  She just dropped it.  This will all get dumped on me soon and I hope to report it correctly.  In truth, these gals/guys have very few deductions other than their product and chair rental. 

[kcjenkins]

Still,  the rules on 'renting personal property plus providing services' are fairly clear, and at a minimum she's providing utilities and maintenance.  What about laundry of towels, etc?  Who provides the towels?  Does the shop have washer/dryer?  Or do they all provide their own towels, and take them home to launder?   "Substantial services" needs more than utilities, but not a lot more, to most auditors.  I'd generally advise taking the safe route, because that's 'easy pickings' for a loss on an audit, and it's best she starts off right.  You don't want to invite an audit of any business that does a significant cash business, in my experience. 

[mcb39]

Thanks KC.   She  does provide the towels and the washer/dryer.  I  believe that whoever has extra time does the laundry.  So, you are saying include it in her SE; as (other income)?  She will get to deduct the rent she will be paying for the entire building.  Am I correct in that we amortize the purchase amount she paid for the business?.  Then she gets to deduct the interest on the loan.  Am trying to get this straight in my head.  She is probably the MOST honest client that I have.  Reports every penny, including tips.  Only takes mileage when she is shopping for supplies.  Her services are not subject to Sales Tax in Wi; only the product she sells.  She is anal about writing everything down.  She also pays her estimates religiously.  She runs everything past me and is a nuisance at times, but she does an awesome job on my hair.  Incidentally, I pay her for her services and she pays me for mine.  We are in total agreement on that.

[BulldogTom]

I am with KC.  At a minimum, she is in the business of renting space to stylists.  Otherwise, what "blue sky" did she buy?  Yes on all the expenses (rents, utilities, insurance, etc) related to the buiding she rents out and sublets to the stylists.  Yes on the interest on the business loan.  Yes on the amoritization of the acquistion costs.  All of it goes on the Sch. C.

 

Tom

Hollister, CA

[Lion EA]

Her purchase price might have included an amount for depreciable equipment, that washer and dryer, for instance.

[kcjenkins]

I'd put it on Sch C, since she IS "in the business of renting personal property".

 

From the IRS:  Topic 414 - Rental Income and Expenses

Generally, cash or the fair market value of property you receive for the use of real estate or personal property is taxable to you as rental income. You can generally deduct expenses of renting property from your rental income. Income and expenses related to real estate rentals are usually reported on Form 1040, Schedule E (PDF). If you provide substantial services that are primarily for your tenant's convenience, you report your income and expenses on Form 1040, Schedule C (PDF). Income and expenses related to personal property rentals are reported on Form 1040, Schedule C (PDF) or Form 1040, Schedule C-EZ (PDF) if you are in the business of renting personal property and directly on Form 1040 (PDF) if you are not.

[kcjenkins]

Her purchase price might have included an amount for depreciable equipment, that washer and dryer, for instance.

And the chairs, of course!  Certainly a significant part of the purchase should go to the equipment.  

[mcb39]

Thanks guys and gals.......you are clarifying this for me.  She did purchase all of the chairs, sinks, dryers, tables, furniture and fixtures as well as the name and the clientele.  The previous owner walked away with the money and will proceed to render services out of her home.  I totally blanked out the depreciation aspect.  Where do we place the value on this used equipment, including the chair that my client will continue to use?  She called me elatedly this morning with the news that she has rented out another chair.  It would be nice if she owned the building because it is in an excellent location, but the lessor is right next door and she doesn't have to worry about snow plowing, etc.  Thanks again so much for all of your help.  This is the place to go!!!!!!!

[Lion EA]

There's a form that both buyer and seller include with their returns that breaks out the types of items that make up the sale of a business.  Also, the sales agreement probably has more or better detail, pricing the furniture and equipment, for instance.  Essentially, it's whatever she paid for it.

[jklcpa]

Thanks guys and gals.......you are clarifying this for me.  She did purchase all of the chairs, sinks, dryers, tables, furniture and fixtures as well as the name and the clientele.  The previous owner walked away with the money and will proceed to render services out of her home.  I totally blanked out the depreciation aspect.  Where do we place the value on this used equipment, including the chair that my client will continue to use?  She called me elatedly this morning with the news that she has rented out another chair.  It would be nice if she owned the building because it is in an excellent location, but the lessee is right next door and she doesn't have to worry about snow plowing, etc.  Thanks again so much for all of your help.  This is the place to go!!!!!!!

 

 

There's a form that both buyer and seller include with their returns that breaks out the types of items that make up the sale of a business.  Also, the sales agreement probably has more or better detail, pricing the furniture and equipment, for instance.  Essentially, it's whatever she paid for it.

 

Lion is correct. Both the buyer and seller file form 8594 that reports the breakdown of the sale/purchase by class. The instructions for the form describe the classes. Depreciable assets are class V; inventory, stock, products are class IV; many intangibles fall into class VI; goodwill and going concern are class VII. 

[MAMalody]

Usually, for the Form 8594 to work, the agreement for the cost breakdown is part of the sales agreement.  Your comment that you went blank on depreciation would indicate that may not be part of the original sales agreement. The IRS does crossmatch the buyer and seller forms 8594 to ensure they are the same.

[Medlin Software, Dennis]

"She did purchase all of the chairs, sinks, dryers, tables, furniture and fixtures as well as the name and the clientele."

"The previous owner walked away with the money and will proceed to render services out of her home."

 

Not that the buyer asked your advice, and it is likely too late to intervene:

What did they buy as "clientele"?  As a former renter, the new owner should not have to pay for her own list of clients.  The other renters are not likely sharing their list of clients.  The former owner?  The former owner may have "sold" their list, but the value is little since many/most will follow the old owner.  (Having a daughter with "complicated" hair, we follow the stylist no matter where she goes.)

 

Even the shop name is of little value since the former owner is simply moving to another location (home).

 

True story.  My daughter's stylist worked for a chain in a mall.  When she moved from the chain to renting a booth elsewhere, we did not hear about it right away.  When we called the chain for an appt, the receptionist was not shy about telling us where our person moved to and giving us her cell number.  It is such a personal business, this is what may happen to your client as well, as your client may even be the one letting the customer know where the former owner is - if she does not, the customer will eventually find out and become a former customer anyway.

 

added:  If there was some sort of master list under the former owner's control (the only way I would see the list as having a value), the former owner was more than likely an employer since they controlled the clients and thus, scheduling.

[mcb39]

Actually, I have not seen the buy/sell agreement.  My client is on vacation this week; as am I.  I am quite sure that Mr. Medlin is correct in regards to the list of clients.  They actually had a notice on the door for several weeks that the previous owner was leaving and where she was going.  This is not a big time salon.  It is a small, friendly, we all work together at certain things place.  However, the location is excellent and I believe that they have quite a few walk-ins.  She didn't pay all that much for the business.  $10,000; so the retention of the name and the equipment is pretty much it.  The seller is relocating about 30 miles away so it would be reasonable to  believe that some of her clients will opt for the location rather than the stylist.  All girls in the salon do not provide the same services.  One is strictly manicures; pedicures.  Another has a massage table.  My girl is strictly a hair stylist.  I didn't see her actual Sch C changing much except for the rental income and that was the basis of my OP.  I am not even sure that they all pay the same amount of rent.  Thanks so much for all the input.  You all opened up issues that I had never even thought about.  I will get that purchase agreement when we both get back.  She is pretty adamant that I keep copies of everything pertaining to her business; which is an LLC disregarded entity.  I sincerely hope this is her last change because we have had to first establish her business when she moved from a salon where she was an employee; an then had to change everything when she moved to this salon.  Now, again, all documents needed to be changed.  She always was "name at business name.; twice.  She now is just Business Name.

[kcjenkins]

I'd still use the Form 8594, if only for your planning, although as this is a friendly deal, it's possible that the seller will be happy to work with you and your client to agree now on the numbers on a Form 8594.  Since it tends to protect BOTH SIDES from being audited when they both file matching forms.  It removes the question of whether the numbers reported match, the IRS can check them within the system.  

 

Since the building is not an issue, and only the former owner's clients who stay are part of the value of the 'list', most of the cost should  go to the equipment.  Value off the location is minor, since the seller did not own it.  Maybe some value to the lease, if she assumed it and if it was better than  'current value'.