Capital Gain as Income On Schedule C

[Dr_tax]

Hello, 

My first time trying the PTO community but I'm not very hopeful because this is probably a very rare item. My client has an LLC that does factoring in essence. All income comes from capital gains. I can't get the net gain to show as income on the Sch C, so that Sch C shows the income and expenses. I could probably live with it not showing on the Sch C except that it needs to show up as income on Sch C in order to show on CA form 568 which needs to be filed.

Anybody had any experience with this?

Thanks,

Joshua Richman, E.A.

[sjrcpa]

If the business is factoring, why would it be capital gain?

[sjrcpa]

I don't think CA cares where it is reported for 568 purposes. They want the Gross and they want their money.

[George4Tacks]

Schedule C says to me you are dealing with a SMLLC. "factoring in essence" is new to me, but I think that this may be what you are looking for to accomplish what you want to have happen. https://proconnect.intuit.com/support/en-us/help-article/federal-taxes/entering-day-trader-transacti...

You use the words CAPITAL GAIN, which I assume means that the transactions are showing up on a 1099B instead of your desired 1099-K or 1099-NEC. 

[BobKamman]

I occasionally deal with clients who are being hounded by collection agencies, not representing the credit-card lenders they couldn't pay but the vultures who buy up the debt for 5 cents on the dollar.  I think a lot of medical debt is bought that way, also.  So that might be what we're dealing with here.  On the other hand, it might be the All-American Widget Receiver Enterprise LLC, buying receivables from the All-American Widget Manufacturing Company Inc. for 90 cents on the dollar. 

In any case, I would consider the accounts as inventory, not capital assets.  There's a place on the second page of Schedule C for that.  

[Dr_tax]

Hello Bob,

Thanks for taking the time to get an answer off to me. I had done some in-depth research, when started working with this client, to determine the classification of his purchases. I wish I had saved my sources. I usually do, but did not in this case. He is a doctor and he buys the rights to accident settlements by paying the surgery center which performed operations due to injury. These are not for resale, they are held until a final settlement is paid. If no settlement is reached, then he gets nothing. These are speculative in nature. My research indicated it was a very close call as to inventory or capital asset. Based on some specific detail in my research I felt capital asset was appropriate. But I can't recall the detail or seem to find where I found that since I've looking again for the last half hour. For one thing, it has investment qualities since the final price is not determined at the time of purchase, but hoped to be an increase over the value paid. Another thing, it does not seem to fit the inventory definition because it is not for sale to customers. The final document is either disposed when money is received as a final settlement, or written off as bad debt loss if nothing is received. Please let me know your thoughts after reading this. Your input is appreciated.

[BobKamman]

Sort of like the definition of used-car dealer in my state.  Five transactions or less per year, you're not in business and don't need a license.  More than that, you are and you do.  

If you consider what he's selling as receipts (the bill stamped "Paid In Full"), then his customer is the patient who eventually pays the account when the settlement funds are received.  Does it make much difference, whether it's on Schedule C or Schedule D?  I suppose if it's long-term, and for Medicare Tax purposes (assuming he's maxed out already on Social Security).  Next he'll want to be doing it with his pension account, and you'll have to worry about UBTI.  

Facts and circumstances.  My guess is that he's a radiologist.  They're the only medical professionals sophisticated enough to do stuff like that.  

[Dr_tax]

Hello sjrcpa,

Do you have any clients whose business is factoring? I've tried searching to find the tax treatment for that but only find articles that discuss the tax treatment for the company SELLING to the factoring company not the factoring company side. In my client's situation there is a nuance which I think might make it fall under a different treatment. I researched it diligently when he became a client and found a reference that suggested these purchases could be treated as investments, but I didn't save that reference. Not like me, but now I'm thinking I should revisit this. Appreciate input. Thanks.  

[sjrcpa]

It depends on whether it is a one off or a business. Sort of like Bob's reference to used car sales.