Do I 1099 or K1 A partner that supplies labor only

[Businesstax101]

3 Part Question:

I have a new partner in real estate flipping. He was going to be an equal partner in all ways.  However, he did not supply any financing what so ever.  I supplied $345,000 from private lenders, made all the loan payments, hired and paid all subs, maintained an ongoing spreadsheet of the entire project and went to all meetings with the town for a major subdivision.  In addition, I spent an additional $75,000 out of pocket as well.   I also worked 11 months on this project and he only worked 10 months.   

I feel that he should not be involved in the taxes aspect what so ever as far as using the receipts and interest payments as write-offs.  Can I issue him a 1099 for labor only being he didn't spend any money or have any financial responsibility what so ever. 

2nd Question:  For a business established in the sense of buying and selling real estate only and not being under a business name, when the above project sells, will I be taxed as a long term capital gain and will my silent partner be taxed the same or as ordinary income.  It is just over one year on this project.

3rd Question:  I still have to file my 2020 taxes.   I suffered a financial loss on a commercial property that I want to claim and then carry on that loss onto my 2021 taxes.   If I am using Turbo Tax for the first time, will I be able to do my taxes with the above scenario. For the 2021 tax year,  I want to be able to write off all my loan interest, receipts and labor paid out and carry forward the loss from 2020 onto my 2021 taxes to help offset my gains in 2021. 

 Does Turbo Tax offer a service to do my taxes if all of my information was given to you.

Thank you,

BusinessTaxes101

[tagteam]

A partnership does not issue 1099s (here a 1099-NEC) to partners. If anything, this would be in the nature of a guaranteed payment and reported on the partner's K-1.

If the partnership is considered to be a real estate dealer (i.e., buying and selling property in the ordinary course of business), then any profits are ordinary income and the partners would be subject to self-employment tax.

You can use TurboTax Business to file a return (Form 1065) for the partnership, but the return is late for the 2020 tax year (it was due March 15th of this year or September 15th if an extension was filed). Penalties for late filing can be substantial so you might want to seek an in-person consultation with a tax professional.

Intuit (TurboTax) does not offer the service (the one that you are seeking) for business income tax returns. Again, you should seek guidance from a tax professional.

I will page @Rick19744 as he might have additional (or different) input/advice to offer.

[Rick19744]

I agree with @tagteam in that you should consult with a tax professional.  Especially for the initial year; at a minimum.

There are a number of issues and questions that need to be addressed, and a forum such as this does not allow for a good discussion.  You need to have a one on one meeting.

Having said that, I will provide a few comments:

1. What exactly is the business entity?  You only mention "partner".  A partnership is an association between two or more persons who join to carry on a trade or business and formed under state law.  This formation can be in the form of a general partnership, limited partnership, a limited liability company, etc.  So what type of partnership has been formed?
2. You indicate that "this is to be an equal partnership" (partner).  How did this individual become a "partner"?  What capital contributions did each make when the entity was formed?  
3. You indicate that you supplied the financing from private lenders.  Was this before the entity was formed?  This is an important detail that needs to be understood.  See note 10.
4. You indicate that you spent an additional $75,000 out of pocket.  Is this a loan to the business or will this just become additional capital contributed?  If a loan, is there an agreement with a stated interest rate?
5. @tagteam has addressed  some of the direct questions
   1. You don't issue a 1099 to partners.  They will be part of the tax return preparation process and receive a K-1.  This can include just a normal allocation or could include guaranteed payments.
   2. Since this is a trade or business, all earnings allocated to the partners will be ordinary income / loss
6. Was there a project in progress when the "partnership" was formed?  If so, this could complicate the actual formation.
7. When did the trade or business and entity begin?  As noted previously there are late filing penalties; $205 per month per partner for up to 12 months.  You need to address this quickly.
8. Not sure I understand the role and benefit of the "silent" partner.  You need to discuss this with the tax professional.  This will help them understand the goal(s) and help decide the appropriate entity structure.
9. You mention "silent" partner, but then indicate "he" only worked 10 months.  Being a silent partner and working doesn't generally go hand in hand.
10. There are a number of issues that I see around the "private" lending.  Who are the lenders, who actually borrowed the money, etc.  See note 3.

As you can see, there are many questions that need to be addressed in order to provide you with proper guidance.  Spend the $$ to meet with a tax professional.  Don't be penny wise and pound foolish in this endeavor.  That could cost you way more than the upfront professional fees.

[Mike9241]

I have a new partner in real estate flipping. He was going to be an equal partner in all ways.  However, he did not supply any financing what so ever.  I supplied $345,000 from private lenders, made all the loan payments, hired and paid all subs, maintained an ongoing spreadsheet of the entire project and went to all meetings with the town for a major subdivision.  In addition, I spent an additional $75,000 out of pocket as well.   I also worked 11 months on this project and he only worked 10 months.   

I feel that he should not be involved in the taxes aspect what so ever as far as using the receipts and interest payments as write-offs.  Can I issue him a 1099 for labor only being he didn't spend any money or have any financial responsibility what so ever. 

how you feel and what you two agreed to are two different things. if your "partner" disagrees with what you want to do, you could end up in court. I would advise consulting an attorney to find out what can be done legally.

the financial loss must be claimed on the 2020 return since that's the year it occurred.  there is no option not to claim it. if all or part is utilized that will reduce any amount that can be carried over to 2021.  if it is an NOL then by filing late, you have lost the ability to forgo the carryback to 2015.