Friday, December 12, 2008

Reimbursed expenses: Income or not?

Hi June,

I found your site very relieving to a current new gas reimbursement situation.

I'm a musician from Altamonte, Springs, FL. 13 years as an indie with a clean tax record using an accountant every year .

I'm in a band. My drummer drives his own van for me to the gigs with equipment and me inside, but I own the band. He's a good guy. Since the cost of gas has gone up, he has begun charging me gas mileage at approx. $.59 per mile plus tolls. I pay him that with no problem... he's doing me a great service and has done so for 13 years. Recently, my new accountant advised me to put the whole amount (reimbursements and gigs) on my 1099 to him at the end of the year.

I never have done this even when he sporadically charged me for gas w/wear and tear as according to the govt. approved numbers.

However, my drummer (who is not happy about what my new accountant advised) would prefer that I put only the amount of the gig on this year's 1099 (not the reimbursement) since only the gig is real income.

Things are a bit tense.

Usually, before this, I've deducted mileage expenses anyway in my categories at the end of the year should the IRS question it. It's all above board and honest. I'm a chapter "S" corp. and my friend is viewed a subcontractor to me not an employee.

My drummer is afraid/concerned about being red flagged if his 1099 looks different from years past this time around.

Please give me insight and or opinionated options (or hybrids acceptable to the IRS) to maintain my friendship with him should I put or not put both the mileage and the gig total as one at the end of the year. He would rather divide the two amounts himself. I see his point. What are your thoughts? I need some piece of mind between my friend and myself. I appreciate your time and look forward to hearing from you.


Dan

Well, Dan, the big questions may be how good a friend and how good a drummer?

Whatever you pay the drummer, whether for his drumming or driving is income to him. You can give him a statement with his 1099 showing how much is for drumming and how much is for driving.

The drummer then claims the entire income and deducts the cost or running his van using either the mileage method or the actual method. See a little more about auto expenses here More about Business Auto Expense .

You deduct as an expense the total amount that you pay the drummer for both.

In order for you to deduct the amount you pay the drummer for his driving, the drummer must claim what you pay him as income.

There are other ways of treating expense reimbursements -- see here expenses -- reimbursed (6) -- but the upshot is: In order for somebody to deduct the cost of reimbursements for expenses somebody else must include the reimbursement as income. If the drummer did not claim the driving reimbursements as income then he could not deduct the cost of using his van to drive you around.

Best,
June

2 comments:

sarah said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.



Sarah

http://www.thetreadmillguide.com

June Walker said...

Thanks for commenting, Sarah.

I am just back to my blog after handling a lot of end-of-year tax situations for my clients.

I received another question about reimbursements that I am about to answer. Take a look.

-- June