Friday, September 5, 2008

Reimbursed Expenses Included on a 1099

Hi June,

I just discovered your site today.. am I glad!!

I have been an independent consultant since Oct 2006.

I received a 1099 which includes all my reimbursed expenses. My question has to do with the meals deductions: in using Turbo tax, it appears that only 50% of my meals are deductible. That would mean that 50% of meals becomes ordinary taxable income.

Am I wrong?

San Mateo, CA

Dear Claudia,

It is not you who are wrong. Turbo Tax is wrong.

When an indie is reimbursed for expenses and those reimbursements are included on a 1099, the indie may deduct all the reimbursed expenses.

Reimbursed meal & entertainment expenses are not subject to the 50% reduction. I put them on the "Other Expenses" line on the Schedule C and label them "Expenses included in 1099 income above."

The person or company who reimbursed you is subject to the 50% reduction. They often try to get around that by including the reimbursement on a 1099 to an unsuspecting or unknowing indie.

The regulation sounds this way in tax jargon: A nonemployee service provider (e.g., an independent contractor) that provides the required substantiation to and is reimbursed by the service-recipient for meal and entertainment expenses incurred on the latter's behalf isn't subject to the percentage reduction rule. The rule applies to the service-recipient, who can deduct only 50% of the reimbursement.

For those of you wanting to argue this with your tax pro: This is IRS Code Section 274(n)(2)(A) and Notice 87-23.

You see. I told you all I read a lot of those thousands of pages of tax code!!



Anonymous said...

Similar question, but different twist. I'm an indie contractor and paid travel expenses personally, submitted expenses to my customer in an invoice, got paid, then reimbursed myself from my S corp. But I can't find where my accountant deducted any of these in my 2007 1120S. Shouldn't they have been in there? I traveled almost every other week, so it was substantial. What can I do to recoup that (it's all documented in QuickBooks)?

June Walker said...

Dear Anonymous,

If the reimbursement was included in your income then the expense should be deducted on your tax return.

My question to you: Why haven't you asked your accountant to explain this!?

Ask him. Now.

If it was not done correctly then he can do an amended tax return. If the mistake was yours -- because you didn't tell him -- then he will charge you for preparing an amended return. If the mistake was his, then he should not charge you.

Also, as an indie, you have a responsibility to review and understand your tax return BEFORE you sign and file and mail it.


Mark said...

June, you are hired. I have been paying taxes on that 50% for so long, and have had two accountants and an IRS person tell me that was the way it was. I didn't believe it then, and now I know why.

Thank you for your website. It has just become one of my favorites.

I get 1099's - but generally nowhere near what I am supposed to get. This year, about 38% of the income that should have been on a 1099 wasn't. Additionally, when the 1099's come in, they are practically unidentifiable - the entity that ends up paying me often has no identifiable relationship with the party that I did the work for - at least, not unless I dig a lot. Is there any reason that you can think of to even claim the reimbursed meals as income, rather than to just let Quickbooks zero it out (Accounts Receivable in, Accounts Payable out)? I suppose if I get audited they will want to mess with the books, but I am a simple man - and try to do things as simply as possible.

June Walker said...

Mark, you are welcome!

There is no reason to include reimbursed expenses as part of your gross income. However, if questioned by the IRS or the state, you must be able to show why, for instance, $35,000 came into your bank account but only $30,000 was claimed as income.

Best, June