I have what I consider to be a challenging one, but a CPA probably knows the answer immediately:
Backstory:
A prospective business partner (person A) and I (person B) are currently trying to figure out the best way to buy up his current business. We are 50/50 partners in a multi-member LLC (let’s call it Holding Company A) that will act as the “buyer.” His portion is owned personally (person A), and my portion is owned by a single member LLC holding company (Hold Company B)
The “business” we are purchasing is really just a sole proprietorship. However, person A did file for an LLC and has been running money through its bank account. He purchased some equipment new and some used since March of 2021 for a total of 25k, all under his personal name using cash. He’s doing a couple 100k in revenue, and the handshake agreement is that if I purchase his “business” (however that needs to look) for 30k, he’ll transfer all of the assets to Holding Company A and we will share in its business relative to our operating agreement in Holding Company A as 50/50 partners. Essentially, he very much wants a partnership and I do as well, he’s a guy I've known for a long time so I trust him relative to his ambitions for getting “bought out.” In fact, he doesn’t care if it is structured as a balloon payment for 12 months down the line or whatever other terms we see being mutually beneficial. Plan is to make this business a dba under Holding Company A.
Advice/Guide Needed:
- Selling the equipment:
- Would he sell the equipment (with a bill of sale) from himself personally to Holding Company A?
- If so, would he deduct nothing in depreciation for this year?
- Would Holding Company A be able to utilize the 100% depreciation rule for 2021?
- It’s “new to Holding Company A” but he is also personally an owner and member in Holding Company A.
- Does the 100% depreciation rule account for the purchase price of 25k or for the remainder of the useful life of the equipment?
- Given the inflow and outflow of cash to his LLC’s bank account, should he file taxes for the LLC or just roll everything under his “Sole Prop.” Of course he paid local students for labor in cash, no 1099 or W2 (this is all stuff I will handle moving forward).
- How do we account for the additional 5k past the equipment cost of 25k that Holding Company A is buying?
- Lastly, how would you structure this deal if it were you (assuming you wanted to make it happen despite the historic negligence involved)?
- Balloon payment 12 months at 0% interest contingent on distributions from Holding Company A exceeding 30k? Otherwise, remainder to paid via balloon payment in 24 months contigent on the same?
