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Thursday, December 18, 2014

Question

I'm operating a small residential/office cleaning business by myself and I recently purchased a residential account from my former employer for $1,200, and verbally agreed to make $100/month installment payments for one year. Two other residential accounts were given as part of the deal. The value of the purchased account is $5,200/year, and the combined value of the two given accounts is $5,720/year. I have a basic understanding of contracts from an Introduction to Business Law class, and the seller (my former employer) and I only have verbal contracts for residential accounts. My question is, do the seller and I only need a verbal agreement on the terms of the purchased account with written receipts for the installment payments, or should there be a formal written agreement? Aside from the taxes that will be paid on the income from the accounts, are there any other taxes or accounting implications to this purchase?


Answer

Essentially, you bought $10,920 worth of future business for $1200. This seems to be sound transaction as long as the accounts do not cancel before the year is up, and you are making a decent return on the time you spend doing them each month.
To avoid any misunderstandings, it is always advisable to have a written contract or agreement. This need not be complicated, but you should have one in place to stand as a legal record of the transaction for both parties.
Such an agreement might include a contingency clause reducing what you owe to your former employer if any of the accounts cancel your service before the year is over.
Certainly, you should get and keep written receipts to prove payments were made. The seller will pay Federal income taxes on the $1200 sale to you. You will pay taxes on the income from the accounts you now own. Your state has no sales tax. Check www.nh.gov/revenue/faq/gti-rev.htm for other taxes that apply to your income level.
Ask your accountant how to handle the expense of the purchase as a business deduction for the fiscal year. It will likely show up as monthly business expense for the duration of the agreement.
Lynn E. Krafft, ICAN/ATEX Associate Editor
lekrafft@juno.com