From the Archives: Issue a 1099-C to a Deadbeat Client or Customer?

One last “greatest hits” post this week before new material resumes on Monday the 6th.

This is one of my favorite posts, and it’s always in the top 10 each year in terms of views. There’s a strong temptation to send a 1099 to a customer who doesn’t pay an invoice. As I illustrate in this post, it’s okay with the IRS to send a 1099 to a customer in that situation, but it may not really be the best solution.

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Originally published August 15, 2012

1099CI’ve recently undertaken a bit of a research project with my friend Bruce McFarland, The Missouri Tax Guy. Bruce has a few clients who haven’t paid him (ironically, and perhaps a bit humorously, the deadbeat clients are CPAs!). Bruce was wondering if it would be okay to issue a Form 1099-C to the deadbeats.

Form 1099-C is issued when debt is canceled. The instructions to the 1099-C, and the code and regulations, only say that financial institutions and other businesses that are in the “business of lending money” are required to report canceled debt.

So unless your business is in the business of lending money, you aren’t required to issue a 1099-C to a non-paying client.

But are you prohibited  from doing so? It doesn’t appear so, at least not under tax law.

In IRS SCA 1998-020, the IRS tackles this subject and seems to conclude that it’s acceptable for businesses to issue a 1099-C to a non-paying client, even though such reporting is not required.

One thing the IRS memo points out is that even though it’s okay under tax law to issue a 1099-C to a deadbeat client, it might not be okay under other laws, such as laws relating to collection of debt. Since I’m not an attorney, I won’t go into that area.

Within tax law, it appears to be okay to issue a 1099-C to a deadbeat (or I suppose you could threaten to issue a 1099-C, just to scare them, even if you had no intention of actually doing it).

It’s All Right But It’s Not Okay — Or Should That Be, It’s Okay But It’s Not All Right?

Personally, I wouldn’t issue a 1099-C to a deadbeat client. I realize there may be some satisfaction in threatening a deadbeat and seeing them sweat. But I think it would cause more harm than good to go down the 1099-C route.

For example, in the June edition of the NATP “Tax Pro Monthly,” there was a story about someone getting sued for fraud because they issued a 1099-C to someone who owed them money. A court ruled in favor of the person who issued the 1099-C. That’s the good news. But the case shows that a recipient of a 1099-C is likely to fight and protest and threaten and make your life more difficult.  That’s why I say you’d be causing more harm than good by issuing a 1099-C.

I would just fire them, move on with my life and replace the deadbeat with a better client.

From the Archives: Are Donations to a 501(c)(4) Deductible?

donation-517132_1280It’s a holiday week, so as always, I’m re-posting popular blog stories from the past.

This blog post from November 2012 answers a question that comes up a lot. The short answer is: generally no for individuals, and maybe for businesses.

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Originally published November 28, 2012

The question of whether a person can deduct donations to a 501(c)(4) organization comes up periodically. The answer is, no, you can’t deduct those donations as a charitable contribution. Only donations to 501(c)(3) entities are deductible as charitable contributions.

Donations to 501(c)(4) organizations are not deductible as charitable contributions. The only exception is for donations to 501(c)(4) volunteer fire companies — those donations ARE deductible. But otherwise, you can’t deduct contributions to a 501(c)(4).

Businesses that make donations to a 501(c)(4) might be able to take a deduction as abusiness expense, such as an advertising expense, depending on the nature of the donation.

For more tax considerations to think about before making a donation, check out William Perez’s article “Tax Tips for Charitable Giving” at the About.com Tax Planning website.

Image courtesy of user Geralt on Pixabay.com

Tax Implications of Friday’s Ruling on Same-Sex Marriage

Image courtesy of user Nemo on Pixabay.com
Image courtesy of user Nemo on Pixabay.com

The U.S. Supreme Court on Friday ruled that same-gender marriage was legal in all 50 states.

From a tax standpoint, this should — theoretically — make tax filings much easier for anyone in a same-gender marriage. Marriage is now marriage, and all married couples will file all tax returns as married.

But as tax blogger Kay Bell at the bankrate.com blog points out:

Although today’s ruling is momentous, there will be some wedding delays in states where same-sex marriage was banned.

Technically, the Supreme Court’s decision only applies to the four states where the cases before the court originated, Adam Romero, senior counsel at UCLA’s Williams Institute, told NPR. That’s Ohio, Kentucky, Tennessee and Michigan.

Further court action is necessary for the Supreme Court ruling to apply to the other states with bans, but most same-sex marriage advocates expect the judicial system to move relatively quickly.

This ruling should not have an impact on federal tax returns because couples in same-gender marriages have been able to file as married on their federal tax returns since 2013. This ruling affects state tax returns in states that had bans against same-gender marriage.

Couples affected by this should review prior-year state filings, as they may be able to file amended tax returns.

I would recommend waiting a bit to file those amendments, though, to see 1) what kind of guidance is released by state revenue agencies in the affected states, and 2) what happens in the 9 states where further court action might be necessary.

 

 

Choosing a Business Entity: Sole Proprietor

open-208368_1280This is an excerpt from a presentation I give to college students and to prospective entrepreneurs about types of business entities.

A college professor (who’s also an attorney) told me that my presentation on this subject is the best, clearest and most-concise overview of the topic that she’s ever seen.

I’m flattered by the compliment, and will try to translate those positives into a series of blog posts.

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Now that we’ve laid out some basic terms, let’s get into the five types of business entities, starting with sole proprietorships.

Tax Notes About Sole Proprietorships

  1. Income and expenses of the proprietorship are reported on the proprietor’s personal income tax return, using an attachment called Schedule C.
  2. Proprietors pay both income tax and self-employment tax on the proprietorship’s net income. If the proprietorship suffered a loss, the proprietor gets to deduct that loss against other income on their personal tax return.

Advantages of Sole Proprietorships

  1. You’re the boss. By definition, sole proprietorships are owned by one person — the proprietor.
  2. Easy to get into. From a tax perspective, you start a proprietorship by starting to conduct business. You don’t have to file any special paperwork with the IRS to tell them you’re operating (unless you have employees). At tax time, you’ll file your Schedule C as part of your income tax return.
  3. Easy to get out of. If things don’t work out, you simply stop conducting business.
  4. Simple to administer. Generally, your accounting and legal fees will be lower with a proprietorship than with any other entity type.
  5. Easy to convert to something else. If a proprietor decides to incorporate, the process is easy. In our discussion of business entities, remember that it’s easy to go up the ladder (such as from a proprietorship to a corporation) but it’s hard to go down the ladder (such as from a corporation to a proprietorship).

Disadvantages of Sole Proprietorships

  1. Self-employment tax. For people who are new to self-employment, this additional 15.3% tax catches them off-guard.
  2. No salary deduction available. A proprietor can take as much or as little money out of the proprietorship as they wish — but those withdrawals are not “salaries” and are not deductible. (I covered this topic in much more detail in this blog post.)
  3. Income tax and self-employment tax is owed even if the proprietor takes no money out for themselves. (Again, see the blog post I linked to in #2 above.)
  4. Harder to raise capital. Banks may be less likely to take a sole proprietorship seriously. Also, it’s impossible to bring other people on board as investors, because as soon as you do that, you have a partnership rather than a sole proprietorship.

Marriage in the Tax Code, Part 11: Meet the “Single Penalty”

wedding-rings-150300_1280The 1948 tax reform fixed one inequality but created a new inequality – this time between single taxpayers and married taxpayers.

Example:

In 1949, John and Jane are married and have combined taxable income of $3,000 (approximately $29,000 today). Their total tax owed is $600.

Jack is a single taxpayer with taxable income of $3,000. His total tax owed is $620. Jack pays $20 more in taxes (approximately $192 today) even though he has the same amount of income as John and Jane.

As income levels increased, the disparity became more pronounced.

Example:

In 1949, John and Jane are married and have combined taxable income of $10,500 (approximately $101,000 today). Their tax liability is $2,330.

Jack is a single taxpayer with taxable income of $9,500. His tax liability is $2,470. Jack owes $140 more in taxes than John and Jane (approximately $1,350 today) even though his income is $1,000 less than theirs.

Single taxpayers complained about this inequality. In 1951, Congress created another filing status, called “head of household.” The filing status was (and still is) intended for single taxpayers who are raising children.

A new tax bracket was created for head of household filing status, with rates that were halfway between what a single person would pay and what a married couple would pay on a joint return.

More changes came in 1969 when Congress revised the tax brackets to further equalize the tax treatment of married people and single people. The changes took effect in 1971.

And again, in fixing one set of inequalities, the problem was over-corrected and a new set of inequalities was created – the “marriage penalty.”