The tax partner, has just talked to you about one of his clients.The client has ownedretail store for the past four years. He has been able to do very well with the store by offering customers decorating advice along with the unusual items that he sells. Last year, his store earned net income of $125,000

When he first started the business, he set it up as a proprietorship and financed it with a loan of $100,000 from his wife, and a $75,000 bank operating loan. Currently, both of the loans remain unpaid, the client and his wife enjoy a lifestyle that uses up all of their cash flow. They want to pay off the bank operating loan from the business earnings. Once this is done, any excess cash will be used by the client to invest in some property that they will eventually move the store into.

What are the tax issues?

What is the best analysis you propose /advise the clients.

No need to get into the numbers yet