Payments between Schedule C businesses of family members

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m2go
Posts: 92
Joined: Fri Jun 17, 2011 7:05 pm

Payments between Schedule C businesses of family members

Post by m2go » Mon Oct 15, 2018 2:52 pm

I have two questions regarding payments between fmaily members:

1 - My wife and I have Schedule C businesses (in addition to our W-2 income) for occasional payments from consulting, speaking engagements or for
serving on government panels. This is cyclical based on expertise and needs, and lately I've only had expenses with no income, while my wife
is bringing a thousand here or there. So, now I need to figure out what to do to prevent this from becoming a hobby. Are the businesses treated
individually, or is the IRS only looking at the aggregate sum of the two businesses? Would there be a way to fold together the businesses?
Or should my wife just pay me for subcontracting -- we help each other, so that's totally defensible and not a ruse, but I'd be concerned about
attracting the IRS' attention. As a corollary, looking at 2017, would we have to have issues forms 1099-MISC for payments over 600 $ by January
to avoid penalties? Could this be handled by having sold business equipment from one business to the other? (Evidently, we share equipment
anyway, it would make sense to run this as one business, but that's not how it came about for historic reasons... if it is even possible to have
a shared Schedule C business?)

2 - Our son also has a Schedule C business because many internships (esp in the federal gov) pay via 1099-MISC to avoid paying benefits.
We also pay a ton of money because he's still in college, and occasionally he helps his parents. Can we pay his in lieu of giving him gifts /
paying for education expenses? He clearly has a lower tax rate, so that would be advantageous overall. Would we have to issue 1099-MISC?
Can he sell us used equipment (which I understand would not required 1099-MISC to be issued in a timely fashion)? My understanding is that
for sales of any kind, the price usually is whatever businesses agree upon - how about related parties? Can this be used to transfer taxable
income from one party to another? (Certainly, that is how many multinationals have been moving money across subsidiary lines and borders,
to the extent that many countries now have laws governing such scenarios. While not endorsing it, I'm using that to point out that it is a
strategy that's commonly employed and as such not illegal in and of itself)


The corollary for this is that this involves all relatively small sums, so anything that raises eye brows and lands us in tax court is unattractive, because litigation costs, or settling with penalties, would be almost certainly more than any of these items are worth it. So, the question is really, what is considered clearly within the bounds of the permissible by the IRS, based on precedent?

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PaddyMac
Posts: 1480
Joined: Fri Jul 09, 2010 10:29 pm

Re: Payments between Schedule C businesses of family members

Post by PaddyMac » Tue Oct 16, 2018 12:40 pm

We were always self-employed but in the graphic design and consulting business. Our accountant had us file a joint Schedule C. I would think if you share the same home office, printer, internet, phone, etc etc., then sharing the Schedule C makes sense.

More recently we switched to being General Partners, as we entered semi-retirement. Not because joint SchC was not working, it was only because I wanted to build up hubby's SS account more than mine (plus he was more interested in working more than me).

Do you have a trade name? You might consider something like Lastname Consulting, and then use that for the Schedule C filing.

Do you and your wife have a business license? Federal EIN # for filing W-9 to clients?

All these things help to show that your consulting is not a hobby.

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