Tax Prep by Deb Posted January 23, 2015 Report Share Posted January 23, 2015 I am getting ready to do 1099's for a client. The only one I have a question about is one that is given commission checks. My clients father recently closed his business. Instead of selling it to my client they agreed that my client would continue servicing his father's clients and in exchange would give his father a commission on each job. Do I code this as box 3 or 7? The father is completely retired and is no longer doing any kind of work. Any thoughts? Quote Link to comment Share on other sites More sharing options...
rfassett Posted January 23, 2015 Report Share Posted January 23, 2015 A rose is a rose, by any other name, it is still a rose. They can call this whatever they want, but on audit, my bet would be it is, for whatever reason, a disguised installment sale. Are there depreciable assets that Daddy does not want to recapture depreciation on? I would not treat this as any kind of 1099, but as what it is, an installment sale. That is my opinion, for what it is worth. 3 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted January 23, 2015 Report Share Posted January 23, 2015 I agree with Ron that those payments are part of the purchase price and you have an installment sale. Since you won't know the final price until the end, you'll have an adjustment of the final price in the last year. Is there a limit on the number of years these payments will continue, or was 2014 the only year? One reason a sale may be structured like this is because the purchaser will not want to pay full price if customer retention could be an issue, but may not be the case here since it is a son that presumably worked in the business. 2 Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 23, 2015 Author Report Share Posted January 23, 2015 (edited) No limit, and it really wasn't a sell. It was more like a way to allow the dad to retire gracefully and yet still know that his clients were being taken care of. When the sale was first mentioned I discussed with my client and advised against purchase because there really was nothing other than clients and no guarantee that the fathers clients would stay with my client. No assets involved just clientele. The father had severe health issues and my client wanted to help him so this was agreed upon. He received a % of labor charged for all clients that were formally his. Edited January 23, 2015 by Tax Prep by Deb Quote Link to comment Share on other sites More sharing options...
rfassett Posted January 23, 2015 Report Share Posted January 23, 2015 Deb,It really was a sale. Again, they can call it whatever they want. If Dad no longer has any interest other than a % of revenue, then he is receiving payments for the sale of his client base, goodwill, what have you. And issuing a 1099 Miscellaneous is the wrong thing to do. This is often the way professional practices are sold. The seller will get a payout % of continued billings that were in place at the time of the transaction. That is no different than what you are describing. If I sold my practice like I just described to fund my retirement, it would be a sale. Continuing the argument, in proposing the transaction the way you are, you are penalizing the Dad by converting capital gain income to ordinary income. 3 Quote Link to comment Share on other sites More sharing options...
Lee B Posted January 23, 2015 Report Share Posted January 23, 2015 Plus if you put it on a 1099 the IRS will definitely assume that it's self employment income and make you prove that it isn't. The only other alternative would be to create a non compete agreement going forward but that door is closed for 2014. I definitely agree that treating it as a sale of of goodwill or a client list is by far the best approach. 1 Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 23, 2015 Author Report Share Posted January 23, 2015 Thanks so much for your input. I tend to agree with what you are stating, unfortunately I wish I had thought of that (I feel kind of dumb) but I have never run into this before. Right now my client has logged this on their books as Commission, Should it be an Asset maybe named Goodwill? Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 23, 2015 Report Share Posted January 23, 2015 I definitely agree that treating it as a sale of of goodwill or a client list is by far the best approach. I agree. Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 23, 2015 Author Report Share Posted January 23, 2015 You guys and gals are the greatest! I feel very privileged to have your experienced input! 1 Quote Link to comment Share on other sites More sharing options...
rfassett Posted January 23, 2015 Report Share Posted January 23, 2015 No reason to feel dumb. Geez, for real, if that is how we are going to gauge people, they do not come dumber than me. And I say that with complete sincerity. I would set up an intangible on the clients books and call it "Client list". I would take some reasonable number of years of payments for each client that Dad will receive payment for and call that the sale price and start amortizing that as of the day of the transaction. The offsetting entry would be to Note Payable. All payments then would be debited to the note. Now the right way to do this would be to take the present value of the revenue stream and use that number. The difference between that and the actual received would be the interest component of the payments. It would be interest expense to son and interest income to Dad. The rest of the payment would be capital gain to dad. If you are not comfortable with present valuing, put some real numbers on here and I am sure someone that does that can help you. And keep in mind that this sale price will be subject to adjustment at the end because you are using estimates (completely legit) now. 2 Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.