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H&R Block, Inc. Message Board

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  • anunknownelement anunknownelement Dec 30, 2007 4:54 PM Flag

    Can someone answer a tax question for me?

    "Then report the excess amount (if any) as a bad debt." (to far in the red)

    If I remember correctly, reporting the excess amount as bad debt will only work if the taxpayer has selected accrual basis for this business; if this is the first (and presumably also last) year for this business, then selecting accrual instead of cash basis for this business should not be a problem, but if this is not the first year and cash was previously selected as the accounting method, then the bad debt deduction option will not be available unless the taxpayer goes through the rigamarole of requesting permission from the IRS to change accounting methods for this tax year.

    I recall that it is allowable to make a negative adjustment on line 21 of the 1040 for incorrect information documents, but making this change will not also reduce SE tax.

    Can anyone think of an effective and legal workaround for this situation if the taxpayer is cash basis in this business?

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    • "Can anyone think of an effective and legal workaround for this situation if the taxpayer is cash basis in this business?" (anunknownelement)
      --

      Sure.

      (1) Get the payer to issue a corrected 1099 if the first one is incorrect. This is the best solution, but is not always possible.

      (2) Include the full amount shown on the 1099-MISC as income on Schedule C and enter a correcting amount on an "other expense" line, labeled something like "incorrect 1099 correction." Attach a statement (which will probably be ignored) explaining the situation.

      Or: (3) Include only the amount actually received as income on Schedule C. Attach a statement (again, which will probably be ignored) explaining the situation.

      This assumes that the taxpayer is using the cash basis. I would favor Too_far's method for an accrual basis taxpayer.
      In any case, be preparered for IRS correspondence if the difference is more than a few hundred dollars.
      In the "old days," the IRS always assumed that any information documents were 100% correct; it was generally necessary to get corrected documents from the issuer to convince them there was a problem. The good news is that the IRS now officially recognizes that sometimes the issuers muck up the reporting.

      • 1 Reply to cf20502000
      • I use cash basis accounting and this is not my first year in business. I freelanced for the company for 16 years.

        I like your Option #1--Get the payer to issue a corrected 1099 if the first one is incorrect.

        Since I have not yet seen the 1099 (although I know a check was cut and never mailed), I don't even know for sure if I have a problem. I have sent the CEO an email asking when I will be paid and looking for reassurance that my 1099 will match what I've ACTUALLY received. I have not yet received an answer.

        It was a small company, so I have lots of emails back and forth with the CEO fully documenting the fact that they were a "slow pay" for years and that I was not paid for my last project. I would have little problem documenting my case if I needed to.

        I'll keep you posted. Thanks for your help!

 
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