Business Loss

What is the name of your state? California

Hello,
I sold my coffee business 2 years ago but I was made to be a guarantor on the leasehold. A year later, my buyer defaulted on the lease and I was pulled back. I made a negotiation to the landlord that I'd pay him a lum sum amount of $18K in 4 years to get out. Can I claim that amount in my tax return? I was told by my tax preparer that I can't since I'd need to have the other party's SS to file this as business loss, and the problem is I don't have it. Can I still claim it?

Thanks,

Stanley

langtusj said:

What is the name of your state? California

Hello,
I sold my coffee business 2 years ago but I was made to be a guarantor on the leasehold. A year later, my buyer defaulted on the lease and I was pulled back. I made a negotiation to the landlord that I'd pay him a lum sum amount of $18K in 4 years to get out. Can I claim that amount in my tax return? I was told by my tax preparer that I can't since I'd need to have the other party's SS to file this as business loss, and the problem is I don't have it. Can I still claim it?

Thanks,

Stanley

Click to expand...

I disagree with your preparer. Your preparer is assuming that you have to treat it as a canceled debt, and I don't believe that you do. It is not money owed to you, its money owed by you to the landlord. In my opinion that's an ordinary business expense. I suggest that you consult another local tax professional. However, what do you mean by "I'd pay him a lump sum amount of $18k in four years?" If you mean installments over 4 years that's not a lump sum...if you mean that you won't be paying any money for 4 years, then any taxable event will also not take place for 4 years.

Sorry that I was not clearer. I agreed to pay the landlord the total amount of 18K with the following payment schedule:

1) 5K initial payment
2) The remaining is spread out with payment of $361.11 per month.

For the year 2006, I paid ~ $4K to the landlord and I want to include this as business loss.

Thanks

Staney

langtusj said:

Sorry that I was not clearer. I agreed to pay the landlord the total amount of 18K with the following payment schedule:

1) 5K initial payment
2) The remaining is spread out with payment of $361.11 per month.

For the year 2006, I paid ~ $4K to the landlord and I want to include this as business loss.

Thanks

Staney

Click to expand...

How did you report the previous coffee business? Was it on a schedule C?, as an S-corp or LLC? I would continue to report the expense the same way that you previous reported.

My tax preparer put it on 4794 last year so I guessed he did it wrong? I owned the business as sole proprietorship.


Regards,


-s

PS: I used a different tax preparer this year since the old one moved out of the area.

langtusj said:

My tax preparer put it on 4794 last year so I guessed he did it wrong? I owned the business as sole proprietorship.


Regards,


-s

PS: I used a different tax preparer this year since the old one moved out of the area.

Click to expand...

There is no form 4794. There is a form 4797 which would be for the sale of business assets...which would have been appropriate when you sold out to the other party. However, that has nothing to do with the rent you are currently being required to pay. That is an expense of the business that you closed....therefore it would properly be reported on schedule C. It would probably be wise to include a disclosure note indicating that it is a negotiated installment payoff for the balance of your lease.

Sorry I meant 4797. This disclosure note is not a legal form or anything, isn't it? I just have to write couple lines to explain what the expense is for, right?

Thanks very much for your replies.

Regards,


-s

langtusj said:

Sorry I meant 4797. This disclosure note is not a legal form or anything, isn't it? I just have to write couple lines to explain what the expense is for, right?

Thanks very much for your replies.

Regards,


-s

Click to expand...

If you are filing a paper return then a simple additional note will do....if you are filing electronically then whatever software you are using will have the option to add a disclosure note.

One thing I'm afraid is that if I do it differently this year, i.e. on schedule C rather than 4797 form as last year, it would trigger an audit. Though I have nothing to lie on my tax filing, I just mean more headache for me.

langtusj said:

One thing I'm afraid is that if I do it differently this year, i.e. on schedule C rather than 4797 form as last year, it would trigger an audit. Though I have nothing to lie on my tax filing, I just mean more headache for me.

Click to expand...

You cannot do it on form 4797 no matter what. You used form 4797 to report a SALE. What you are reporting now is an EXPENSE. You cannot report an expense on form 4797.
Please go see another local professional.

thank you for all your helpful info

OK, so I put the repayment on Schedule C. I used the Professional Tax Review feature in Turbo Tax to have my file review. The report I got back told me I should report it on Schedule D instead as nonbusiness bad debt: "Based on the information provided, the payment obligation must be reported on Schedule D as nonbusiness bad debt instead of Schedule C "Profit or Loss From Business" because you actually did not run the business anymore." Now I come to the point of total confusion since I don't know what to do any more. Can someone give me a reasonable advise please please pretty please?

Thanks

-S

langtusj said:

OK, so I put the repayment on Schedule C. I used the Professional Tax Review feature in Turbo Tax to have my file review. The report I got back told me I should report it on Schedule D instead as nonbusiness bad debt: "Based on the information provided, the payment obligation must be reported on Schedule D as nonbusiness bad debt instead of Schedule C "Profit or Loss From Business" because you actually did not run the business anymore." Now I come to the point of total confusion since I don't know what to do any more. Can someone give me a reasonable advise please please pretty please?

Thanks

-S

Click to expand...

You received that response because you described the situation wrong. Turbo Tax uses a question and answer format and if you don't answer the questions correctly, you get a bad response....which is why I don't like software that uses a question and answer format.

The first preparer you dealt with wanted to treat it as a cancellation of debt...which you couldn't do because you don't have the SS number of the buyer. While I don't agree with that answer its not an answer that is out in left field. Now Turbo Tax is wanting to treat it as a NONBUSINESS bad debt which is totally out in left field. I am sorry to say that you have wasted money by paying for that Turbo Tax review.

Here is the situation in a nutshell:

You closed a business
You sold its assets
The above items happened in a previous year.

You are still responsible for the lease and have negotiated a payoff plan with the landlord.

You report the lease expense on schedule C. You include a disclosure note that states:

"Schedule C business is closed however rental expense continues due to a negotiated payoff of the lease"

At this point you might be better off giving up on Turbo Tax. Either go see another local preparer (and describe the situation as above) or try some software that does NOT use a question and answer format. A good one is taxesanytime.com and they have free, live support.

Hi Ldij,

You don't know how much I appreciate your answer. This is the first time I attempted to use Turbo Tax and might be the last unfortunately.
In previous years, I used my own Tax Preparer and you see that she also did not do such a fantastic job. It's hard to find a good tax preparer with a reasonable fee, really.

Again, thanks very much.

Stanley

Hi Ldij,

Sorry one more question. Will form 8275, Disclosure Statement be appropriate for making such a disclosure note?

Thanks


Stanley