purpose of 1099s

[clj1219]

I'm back after a long, difficult several months of not being
here on this group. Long story short, I've had two
non-weight bearing splints, one non-weight bearing cast, one
weight bearing cast, one Aircast, been in a wheelchair for
six weeks, on crutches for four weeks and have had surgery.
I now qualify for status of Queen of the Klutz Tribe. <G>

Anyway, the topic of conversation at work yesterday was
1099s and their purpose. Is the purpose so that the payor
can legitimately take the deduction for the expense? Or is
the purpose so that the IRS is aware of the income to the
recipient?

Would the IRS disallow an expense paid by a payor to a
subcontractor purely on the basis of no 1099 being issued to
the recipient?

My question centers around payments to incorporated
subcontractors. In this particular case, it is a real estate
agency paying commissions to real estate agents who operate
as shareholders in corporations. We all know that issuing a
1099 to a corporation, except for certain businesses, is not
required. Our question is, especially in view of the amount
of commissions this agency pays, could the IRS disallow the
deduction for commissions paid to incorporated agents who
were NOT issued 1099s if the agency was ever audited?

Thanks for all the help. You guys rock!

Carol (is it April 18 yet?)

 

[Paul Thomas, CPA]

Anyway, the topic of conversation at work yesterday was
1099s and their purpose. Is the purpose so that the payor
can legitimately take the deduction for the expense? Or is
the purpose so that the IRS is aware of the income to the
recipient?

The purpose of 1099's is not to legitimize a deduction, but
to tattle to the IRS about the income of the recipient.

Would the IRS disallow an expense paid by a payor to a
subcontractor purely on the basis of no 1099 being issued to
the recipient?

Nope. Never have, and probably never will. Nor will an
expense where a 1099 was issued make that expense an
allowable deduction. Think about it, the junkie 1099'ing
their dealer.

My question centers around payments to incorporated
subcontractors. In this particular case, it is a real estate
agency paying commissions to real estate agents who operate
as shareholders in corporations. We all know that issuing a
1099 to a corporation, except for certain businesses, is not
required. Our question is, especially in view of the amount
of commissions this agency pays, could the IRS disallow the
deduction for commissions paid to incorporated agents who
were NOT issued 1099s if the agency was ever audited?

As long as the payments can be tied back to the closing
statements and the agent/agency agreement, they're
deductible.

 

[Harlan Lunsford]

I'm back after a long, difficult several months of not being
here on this group. Long story short, I've had two
non-weight bearing splints, one non-weight bearing cast, one
weight bearing cast, one Aircast, been in a wheelchair for
six weeks, on crutches for four weeks and have had surgery.
I now qualify for status of Queen of the Klutz Tribe. <G>

Anyway, the topic of conversation at work yesterday was
1099s and their purpose. Is the purpose so that the payor
can legitimately take the deduction for the expense? Or is
the purpose so that the IRS is aware of the income to the
recipient?

Would the IRS disallow an expense paid by a payor to a
subcontractor purely on the basis of no 1099 being issued to
the recipient?

My question centers around payments to incorporated
subcontractors. In this particular case, it is a real estate
agency paying commissions to real estate agents who operate
as shareholders in corporations. We all know that issuing a
1099 to a corporation, except for certain businesses, is not
required. Our question is, especially in view of the amount
of commissions this agency pays, could the IRS disallow the
deduction for commissions paid to incorporated agents who
were NOT issued 1099s if the agency was ever audited?

Dear Queen of Klutz,

Sorry to hear of your predicament. Get well soon!

Primary purpose of all 1099's is to inform IRS of income
they should be looking for. And yes, they have used that
during audit to deny deductions, although in the event of no
1099's to obvious employees, it's a moot point. Other
issues are present then.

It irks me to see corporations bring me 1099's issued to
them from payors who don't know the rules.

Now, as for the case of real estate agents who incoporate
themselves, usually as S corporation to get rid of SE tax,
that's another thing. We're discussing and cussing this
trend among realtors elsewhere, and some day, IRS is going
to start an "initiative" to check up on these.

ChEAr$,
Harlan

 

[Phil Marti]

Anyway, the topic of conversation at work yesterday was
1099s and their purpose. Is the purpose so that the payor
can legitimately take the deduction for the expense? Or is
the purpose so that the IRS is aware of the income to the
recipient?

Primarily the latter.

Would the IRS disallow an expense paid by a payor to a
subcontractor purely on the basis of no 1099 being issued to
the recipient?

They would have no basis for doing so if the expense was
legitimate. They have been known to do 1099 compliance
checks and assert penalties for failure to file required
ones, and I presume they'd do such a check in an audit.

 

[clj1219]

The purpose of 1099's is not to legitimize a deduction, but
to tattle to the IRS about the income of the recipient.

Nope. Never have, and probably never will. Nor will an
expense where a 1099 was issued make that expense an
allowable deduction. Think about it, the junkie 1099'ing
their dealer.

As long as the payments can be tied back to the closing
statements and the agent/agency agreement, they're
deductible.

That has been pretty much my take on it. I can't imagine
the IRS disallowing a legitimate deduction because a 1099
wasn't issued if one was not required. Even if we're
talking about the dollar amounts related to real estate, I
can't imagine the deduction not being allowed if it was
legitimate.

We just want to make sure that deductions which are
legitimate and necessary are allowed.

The bad part of this is by not doing the 1099s for the
incorporated agents, it gets into our pocketbook. <G>

 

[clj1219]

(e-mail address removed) wrote:

Dear Queen of Klutz,

Sorry to hear of your predicament. Get well soon!

Primary purpose of all 1099's is to inform IRS of income
they should be looking for. And yes, they have used that
during audit to deny deductions, although in the event of no
1099's to obvious employees, it's a moot point. Other
issues are present then.

It irks me to see corporations bring me 1099's issued to
them from payors who don't know the rules.

Now, as for the case of real estate agents who incoporate
themselves, usually as S corporation to get rid of SE tax,
that's another thing. We're discussing and cussing this
trend among realtors elsewhere, and some day, IRS is going
to start an "initiative" to check up on these.

Thanks for the good wishes. I'm back on my feet, so to
speak, and actually doing better than I have in several
years. I'm just glad all that bad stuff happened between
July and November and not during tax season.

Thanks, too, for the weigh in on the 1099 issue. Yeah, I'm
with you on the issue of real estate agents incorporating to
get rid of SE tax. That, IMO, is the next hot button for
the IRS to take up. Five years ago, we rarely saw an agent
who was incorporated, maybe one out of every 20 for this one
agency. This year, about 20% of this agencies agents were
incorporated. We used to only see brokers who were
incorporated. Not anymore.

 

[clj1219]

Primarily the latter.

They would have no basis for doing so if the expense was
legitimate. They have been known to do 1099 compliance
checks and assert penalties for failure to file required
ones, and I presume they'd do such a check in an audit.

Thanks Phil.