USA Schedule C or investment earnings?

[sch22102]

For the last year or so, I have been buying cars for a used car dealer that I've known that ran into financial trouble so that he could keep cars on his lot and stay in business. When he sells the car, he keeps a set amount and I get the remainder which includes the initial investment (price of car and repairs) and a profit. I put this on my tax return as a Schedule C since there are additional expenses that I have incurred as well but never actually set a business up with the city. I recently got a notice from the County in which I reside stating that I need to pay business license tax on the gross receipts.

My questions are as follows:
1) Should I keep this as a Schedule C on my taxes since it is sort of a side business for me or should I record the profits as investments earnings (much lower tax rate but not quite as lenient on business expenses)?

2) I'm not sure what to do about the business license tax since technically, the dealer is paying the taxes on the same sale?

Thanks in advance for any responses.

 

[Samir]

Buying and selling cars in the US (I'm assuming you're in the US) has a lot of paperwork and regulations that come with it. And to make it even more complicated, it varies from state-to-state.

You can run a business as a sole proprietor on a schedule c. There is nothing you have to file or create to do this, although most people will incorporate in some form (C corp, S corp, LLC, etc).

What you could do is form an LLC that has the dealership as a minority partner. This way, you have a 'real' LLC and file a 1065 tax return with the IRS. You need to get a separate EIN for this company. This LLC can purchase a car and then sell it to the other company, recording all the expenses of having to do such. But because it will be making a profit, there will be some taxation and licensing you will need to research. Essentially, you will be an auto wholesaler, so you will have any tax obligations a company that does this will have.

For the business license tax, you will need to pay this. Every business in every state (sometimes even city and county), needs to have a business license. Without one, you're technically running an illegal businesses.

 

[sch22102]

Thank you so much for the quick response. I guess my only other question is that if I leave it as a Schedule C on my tax return and run it as a sole proprietor, is there additional paperwork that I would need to file with the city so that they can collect their business license tax or is this something that varies from city to city (I'm in Virginia).

 

[Samir]

Whatever entity structure you leave it in (Sched C or not), there will be some sort of paperwork for the city, possibly county, and the state. You'll have to research all the licensing and see what you need to do.

The good thing is the license is a clear business expense, so you should easily be able to write it off on your Sched C.