Q:

Subject: Question on lease/credit transaction

 

Kerry,

 

A friend of mine has asked me to run some lease/credit transaction through my company. I’m a bit hesitant as I don’t know if there are any potential issues (tax and/or legal) with it. Could you let me know what you think about it?

 

Here are the details from this friend’s mail:

 

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Basically, our company has a lease credit line of like an additional 90K. We need the cash to pay for current expense as behind a bit on cashflow in expansion. We’ve used the lease credit before for all kinds of product/services purchases.

 So, what I’d like to do is get a software product/services Invoice from you for 80K. The leasing company will pay you 80K. Then you can issue us a credit back of 75K, that will be paid to you company anyway for normal development services over the course of few years. I need to discuss this with you quickly, as it will take a few weeks to get this finished. On your books it will look like 80K income for product/services and a credit or expense of 75K out.

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 thanks

A:

From an income tax perspective, there would be no problem with this transaction, as long as you report the full $80,000 received as income and then the $75,000 paid out as an expense.

From the perspective of legality, it sounds like a completely different story.  I’m not an attorney, but there are aspects to this that smell very bad to me.

What could potentially be a problem is with the leasing company.  This sounds suspiciously like a fraud against them.  You should contact that company before submitting an invoice because I am guessing that they are either planning on using the product you are selling as collateral for a loan or as an actual purchase by them to be leased to your friend.  If they were to find out that no such product exists,  they could sue you, or file criminal charges against you, for theft.

It would be like selling someone an item and not delivering it after being paid for it.  It may be possible that future consulting services would be acceptable to the leasing company, but that is not very likely.  I would be amazed if it was acceptable.  They generally prefer to work with tangible assets that could be re-possessed and resold or re-leased.

It’s obviously your call; but unless you can get assurance from the leasing company that there is no problem with your submitting an invoice for future work to be done, I would stay away from this.  Although your friend is instigating this, the leasing company would have very strong grounds for legal and criminal action against you for the full $80,000 because you are the one they are paying that to.  The fact that you are only keeping $5,000 of that money won’t do you a bit of good in this kind of case. 

The final decision is yours; but I hope this helps you make a safe and rational decision.

Good luck.

Kerry