Schedule C question

[MNAP]

Hello all and thank you for reading! 

The client has a software business set up as an LLC that is filed on schedule C with his 1040.

a while back he took on a partner/investor who made a 300K cash infusion for an equity %in the Company. i think it was 30%

long story short is he has now as of TY 23 bought out the partner for a mutually agreed upon price of 80K for all of the 30% back.

The business has been showing major losses for a while and for the first time in 2023 it had income although still a loss over all. he was audited by NYS for 2022 ( big loss), so i am being cautious with just entering the 80k expense without insight. he has all the receipts for everything so ultimately we are not worried.

my question, what is the correct way/terminology to classify the expense as a single line item on the schedule c. Shall i enter guaranteed payment to partner or partner buyout. or am i completely off.

i have took into consideration the whole idea of the LLC not being filed as a partnership return in case you are wondering. 

need guidance please. 

thank you so much

[TaxMonkey]

When Partner B contributed $300k to the LLC it immediately became a partnership. Which raises concerns, since apparently no partnership returns were filed and it leaves us wondering how losses were allocated, and whether an IRC 754 election was made.

When an LLC with two members, becomes an LLC with one Member, it is treated as if the partnership has distributed all assets of the LLC to each of the partners, and the the remaining partner purchases the assets, in this case for $80k.  This money will be allocated among the assets of the partnership, and if any remains to goodwill.  None of it will directly be an expense on the P and L.

This process is addressed (somewhat incompletely) in Rev Rul 99-6

http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl6b5/3/doc

[qbteachmt]

"a while back he took on a partner/investor"

You need to clarify what "a while back" really is: which specific tax year? Did this all happen in 2023, for example?

You call this a "partner/investor" indicating it was not considered a loan to be repaid, nor was there to be any sort of cycle or payment(s) due at any specific interest rate. Is that true?

"just entering the 80k expense without insight"

What you have is the difference between Expense and Expenditure. An expense is when something like rent or printer paper or electricity is paid for and Poof! The thing that got paid for was all used up. An expenditure is when cash flow has happened to service debt, to buy new assets, or otherwise to make an investment. What the $80k is, is some sort of purchase of the portion of the business, which means it is more of an asset cost (investment) and not Expense.

When this was audited in 2022, how'd that go? If that is a year there were partners, the auditor would have expected a partnership return, not a Sole Proprietorship Schedule C attached to an individual's personal tax return. Is a partnership return what you filed for State, but not a partnership 1065 for Fed?

"Shall i enter guaranteed payment to partner or partner buyout. or am i completely off."

A Sched C never has partners. There is no provision for guaranteed payments on Sched C.

Did someone mentor you through the audit?