Income vs Expenses

[Edward]

T/P income vs expenses way out of line. Net Income 9800.00,(Sch C). Greeting Cards designer. He has a nice home of which the Mtg Interest, Prop Taxes and Insurance wipe out the 9800.00. and I'm certain he will end up with a loss. I questioned him on this and after a long session he finally admitted that there were two other men living with him and that they were contributing necessary cash to meet all expenses - he says the others are managers of well known local stores so I would say they have the ability to possibly assist him in the additional expenses. BUT, how can I include this info (or can I) on the tax return so that IRS will be aware of this odd financial arrangement? Any help will be appreciated...

[Karen Lee]

T/P income vs expenses way out of line. Net Income 9800.00,(Sch C). Greeting Cards designer. He has a nice home of which the Mtg Interest, Prop Taxes and Insurance wipe out the 9800.00. and I'm certain he will end up with a loss. I questioned him on this and after a long session he finally admitted that there were two other men living with him and that they were contributing necessary cash to meet all expenses - he says the others are managers of well known local stores so I would say they have the ability to possibly assist him in the additional expenses. BUT, how can I include this info (or can I) on the tax return so that IRS will be aware of this odd financial arrangement? Any help will be appreciated...

Schedule E Rent Income???

[Pacun]

T/P income vs expenses way out of line. Net Income 9800.00,(Sch C). Greeting Cards designer. He has a nice home of which the Mtg Interest, Prop Taxes and Insurance wipe out the 9800.00. and I'm certain he will end up with a loss. I questioned him on this and after a long session he finally admitted that there were two other men living with him and that they were contributing necessary cash to meet all expenses - he says the others are managers of well known local stores so I would say they have the ability to possibly assist him in the additional expenses. BUT, how can I include this info (or can I) on the tax return so that IRS will be aware of this odd financial arrangement? Any help will be appreciated...

There is no odd arrangement... the managers are paying rent. You need to report that income on Schedule E and maybe you should use FMV for the rent. Remember that you(most likely) will devide the house in three parts and two of them will be depreciated. Since he has his own business, you should ask for his bank(s) statements and see how much money went in. Don't forget to add as rental income the money the managers give him for expenses.

On a second thought, you are right... this is an odd arrangement and remember that most odd arrangements are aimed to tax avoidance. Ask you client to give these managers a rent contract.

[ILLMAS]

There is a chance you will lose this client, I have dealt with clients like this before. Their story changes from collecting rent to borrowing money or using money from savings, but at the end we are not auditing their information, that's the IRS job. But now that you know he collecting rent set it up on Sch E, capitalize % use for business and deduct expenses related to the business use, it will probably be a wash.

[OldJack]

Well... sometimes we should think twice about what we ask a client. Granted, the live-in's paying something could question the deduction calculation, however, if they are only paying for certain shared expenses that does not mean it is reportable rent income. Check all facts with the client.

[Edward]

I just talked to the potential client and found out that there are three people living with him and not two like he originally said. His responses are conflicting and don't match what he originally told me. In view of the "odd situation" here and the potential for IRS audits, I have decided to suggest to him that he return to the original preparer that he has been using for the last 6 years. He then told me that she charges too much; and after I informed him what I may be charging, he agreed that it would be better to go to the

original preparer........so that ends this chapter..... thanks for everyones input....

[jainen]

>>she charges too much<<

That's the classic way to get rid of an undesireable client. Always ask why the client is changing preparers. Most of us haven't raised rates much in the last couple of years, so if that's the reason, watch out!