Lee B Posted March 9 Report Share Posted March 9 I am working with a new client (Form 1065) who started a painting business in early 2023. A lot of the equipment they are using was purchased in late 2022 for cash with no documentation. They have given me a detailed list but there are no invoices? I would appreciate any suggestions about how to handle this situation? TIA Lee Quote Link to comment Share on other sites More sharing options...
Catherine Posted March 9 Report Share Posted March 9 First question I have is how much money are you talking about? A couple thousand bucks of ladders and drop cloths and stirring blades? Or tens of thousands including scaffolding and compressors and sprayers? If the latter, and they honestly don't have invoices, send them to get you (1) a detailed & annotated list including item, who purchased from, for how much and when, and then (2) prices for new same-type items from Lowes or Harbor Freight or specialty suppliers, showing prices. If comparing those two shows a reasonable price paid for used - as opposed to new - equipment, then I would accept it. After reading them the riot act (in print - and get them to sign & date that, give them a copy and you keep the original) that they are never, ever, to buy substantial equipment again without at least a sales receipt showing date, amount, what, and from whom purchased. If the former, I'd still do the letter riot act, and have them bring price sheets for similar ladders etc., but not necessarily require as strict an itemized list. If that means they go on extension while they dredge this all up, that is not your problem, but theirs. Of course, if you think they're cheating, or that they stole the equipment, hand 'em back their docs and wave bye-bye. 5 Quote Link to comment Share on other sites More sharing options...
Lee B Posted March 10 Author Report Share Posted March 10 The total is about $20,000. Quote Link to comment Share on other sites More sharing options...
kathyc2 Posted March 10 Report Share Posted March 10 Is this a client you would want? Would you have confidence that they would count the sales they receive cash payments? Don't forget that if they paid cash there is likely use tax due on purchases. 2 1 Quote Link to comment Share on other sites More sharing options...
BrewOne Posted March 10 Report Share Posted March 10 and I could see this type of client paying cash to "independent contractors" 1 Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted March 10 Report Share Posted March 10 Just curious about the 2022 return. Any Sch C Painting work on that return? Seems that this guy was already a painter before he started this business. Was he calling it a hobby, side gig, hustle or some other term that on the street means "I get paid in cash and I don't have to tell anyone". The part about "paid cash" is I think what has all of us looking at it twice, because cash is so easy to put in your pocket instead of into your bank. Tom Longview, TX 2 Quote Link to comment Share on other sites More sharing options...
mcb39 Posted March 10 Report Share Posted March 10 I have a client who was seriously lacking intelligence when he put the cash in the bank; then ate out and bought groceries, etc. with his credit card. The Hammer fell and he is on a payment plan to the IRS well into his senior citizenship and retirement. Regarding your client, Lee, I would give him the benefit of the doubt for now. I know when I started my business many moons ago, I placed into service used equipment that I happened to already own before I operated as a business. (tax returns for family, friends, etc.) Only you can get the "feel" for the honesty of your client. If you believe in him; educate him on how to conduct a business going forward. I don't like the idea of a Partnership starting out; but then who knows? My husband started a small Partnership 50 years ago. Even though our son bought out the other partner several years ago; they are still going strong and I am the one who gets to crack the whip. 3 Quote Link to comment Share on other sites More sharing options...
Corduroy Frog Posted March 10 Report Share Posted March 10 I always take the word of the client, unless there is a suspicious reason not to. It is the job of the IRS to audit them, not mine. One concern is that these assets were purchased prior to the formation of the partnership, and were contributed as capital investment - i.e. "hot" assets. They will have to be tracked if that is the case for five years. Also, my experience is that the partnership will not last long, unless they are bound together like family members. I don't know how many of these partners love each other to start with, and after six months they are ready to go their separate ways. Running a business is not the same as painting. 5 Quote Link to comment Share on other sites More sharing options...
mcb39 Posted March 10 Report Share Posted March 10 10 minutes ago, Corduroy Frog said: I always take the word of the client, unless there is a suspicious reason not to. It is the job of the IRS to audit them, not mine. One concern is that these assets were purchased prior to the formation of the partnership, and were contributed as capital investment - i.e. "hot" assets. They will have to be tracked if that is the case for five years. Also, my experience is that the partnership will not last long, unless they are bound together like family members. I don't know how many of these partners love each other to start with, and after six months they are ready to go their separate ways. Running a business is not the same as painting. Absolutely correct!!! 3 Quote Link to comment Share on other sites More sharing options...
Lee B Posted March 10 Author Report Share Posted March 10 It's a husband and wife partnership. They were referred to me by my largest business client. The wife works as a Human Resource Manager for a good sized company. The cash appears to be from the sale of their previous house. The husband used to work for his families painting business which I know nothing about. My current working agreement with them is that I will be doing their monthly recordkeeping plus their payroll. He plans to hire his nephew as an employee. In addition I will make sure they will handle any independent contractors correctly with respect to their liability insurance, workers compensation coverage and 1099 NEC reporting. I plan to very proactively stay on top of everything and if questionable stuff starts happening I will pull the plug. We see what happens? 4 Quote Link to comment Share on other sites More sharing options...
Lee B Posted March 10 Author Report Share Posted March 10 17 hours ago, kathyc2 said: Is this a client you would want? Would you have confidence that they would count the sales they receive cash payments? Don't forget that if they paid cash there is likely use tax due on purchases. Oregon doesn't have a sales or business use tax so there's no potential liability there. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted March 10 Report Share Posted March 10 Sounds like a good client - or like you have decided they are a good client. Back to the original post. FMV of the items on the date contributed to the partnership is the Basis of the Fixed Assets. Depreciate under the normal rules for used equipment. Most conservative approach is to get an appraisal. If they want to be a little less conservative, use Garage Sale or Craigslist pricing for used items of similar value. If they insist on using the amounts they say they paid for them (and if you believe them), get them to write a letter to you signed and dated that says this is the value of the property they contributed to the partnership. It does not have to be confrontational, just explain that you are there to protect them from audit risk. and the riskiest way to go is take their word for the basis of the property. Tom Longview, TX 4 Quote Link to comment Share on other sites More sharing options...
mcb39 Posted March 11 Report Share Posted March 11 5 hours ago, Lee B said: It's a husband and wife partnership. They were referred to me by my largest business client. Have you considered a Qualified Joint Venture instead of a Partnership? Two Schedule C's instead of a 1065 1 Quote Link to comment Share on other sites More sharing options...
Lee B Posted March 11 Author Report Share Posted March 11 They have already obtained an EIN as a PTS Form 1065 over a year ago. I wouldn't use a QJV for this type of business. 1 Quote Link to comment Share on other sites More sharing options...
Lion EA Posted March 11 Report Share Posted March 11 If they haven't formed a state entity (SMLLC or MMLLC or whatever your state allows) and are H&W and are filing their first return for 2023, they can choose between a QJV and a PTS. (IF in a community property state, can choose QJV even with a state entity.) 1 Quote Link to comment Share on other sites More sharing options...
Lee B Posted March 11 Author Report Share Posted March 11 They formed an LLC with both spouses listed as members in late 2022. They obtained an EIN in early 2023 as a Partnership and the IRS expects to see a Form 1065. They also registered with the state Construction Contractors Board as a MMLLC. I plan to file a 2553 and have them elect to be taxed as an S Corporation for 2024. 1 Quote Link to comment Share on other sites More sharing options...
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