How to designate an investment in a company you do not own?

[Anglis]

I have a client that has invested $30,000 into a pharmaceutical company, and will be getting her initial investment back. After that, she will be receiving a 1099 interest statement monthly on a $ % she will be receiving as income for this investment.

Can she start a small business, designate herself as an S Corp investment company and hire a person to help her keep the accounting?

What would anyone recommend regarding this investment?

[TaxGuyBill]

PLEASE tell this client to go to an attorney to look into this transaction before this poor lady is scammed into 'investing' any more money.

It is too bad that personal theft losses are no longer deductible ...

[itonewbie]

That's the cold hard truth, unfortunately.

[Just-Lisa-Now-]

For the sake of argument, lets just say this is some kind of a legitimate deal (maybe the figures are drastically skewed in the presented situation)...for my own knowledge, could she form an S-corp to collect these monies to save on taxes?  maybe it wouldn't even save anything....if its not earned income, it would pass thru the same as collecting the money as an individual.

[TaxGuyBill]

@Just £isa Now!   As you said, unless the income is for 'working' and subject to SE tax, a S-corporation would not save anything for a legitimate transaction.  The income would still be 'passed through' to the Individual.

[abctax55 · Accepted solution]

Brings to mind the old saying "pigs get fat, hogs get slaughtered"

And "paying the husband" wouldn't be of any real benefit on a joint return....

Something smells 'bout this.

[TaxMonkey]

As others have said, you need to research whether the $30k will be a deductible loss, but there is no way that woman will see a dollar.  Please come back and update us if I am wrong.

[IRonMaN]

Sounds like an elaborate plan for a $30,000 investment.  Personally, I would just cash the checks as they come in.  I am curious though, if she is getting her investment back, why will they be paying her interest?

[Anglis]

She has signed a contract that allows her to get paid a % of income on a monthly basis. Possibly looking at $25,000 per month. So what she has asked is whether she can start a small business for this income to show in, and possibly save on taxes?

[Anglis]

This is what she told me: Investment was from a Roth IRA to invest in pharmaceutical sales, which was used to increase sales staff at that company. She will get her initial investment back and then a few months later she is to receive $$ monthly based on those sales. She wants to hire someone to do admin work for this, since she will be receiving this monthly income and would like to write off some expenses associated with this income.

[itonewbie]

Investment of $30k would generate monthly return of $25k after a few months, from a pharmaceutical company's sales.  Did I get that right?

[itonewbie]

"Investment was from a Roth IRA"

Is this a self-directed IRA?  The fact that she's thinking about setting up a company now hints to this not having been structured correctly.

[Anglis]

Correct regarding the monthly return. No it is not a self directed IRA, she is over 60 years old and a person needed monies to help with this sales company, so she withdrew her monies and invested into this company. Upon investment the agreement was for her to receive a % of income on sales.

[itonewbie]

Have you seen the agreement between her and the company?  That could determine the character of the income and how it should be reported.

Something just doesn't smell right.  The ROI is just so unrealistically out of this world.

[itonewbie]

Have you seen the agreement between her and the company?  That could determine the character of the income and how it should be reported.

Something just doesn't smell right.  The ROI is just so unrealistically out of this world.

[Just-Lisa-Now-]

"and will be getting her initial investment back"

So none of this has happened except for her giving them money she took from her ROTH?

[Anglis]

Not yet, she is just asking how to structure this income? She is expecting her monies back in mid June.

[IRonMaN]

"since she will be receiving this monthly income and would like to write off some expenses associated with this income"

She invested $30,000 and will soon be getting that back and then be collecting $25,000 per month.  Assuming that is really going to happen, what kind of expenses would she have if she is just collecting a monthly check?

[Anglis]

She wants to pay her husband a $1000 a month to manage this process. Put him on wages.

[IRonMaN]

To deposit one check per month? :confused:

[Just-Lisa-Now-]

seems like a lot of extra work for such a small amount of tax savings.

[qbteachmt]

Here's what I see:

A person is a lender to the other entity. The first repayment is the original investment. None of these paragraph falls under tax reporting. Why would you Pay someone $1,000 a month, during this cycle?

The next part of the lifecycle is collecting some % of sales, like a commission. The business no longer has any of the investor's funds. This won't be a 1099-INT, because this is not Interest. There is no investment at this point. This would be 1099-Misc earnings. And why would you pay a person to handle the funds that are paid out once a month?

I agree; everything about this Smells bad.