I paid a contractor in Dec 2021 with a check, but they still have not cashed the check and it's 2022 already. Can I still include them as an expense for 2021?

[f404]

I have an single member LLC taxed as an S-corp.

1. I paid a contractor in Dec 2021 with a check ($12,000), but they still have not cashed the check and it's 2022 already. Can I still deduct that payment amount ($12,000) for 2021?
2. In TurboTax Business, it includes the expense as part of the "Other Deductions" line 19 on the 1120-S and it includes another page called "Additional information from your 2021 US Form 1120s: Income Tax Return for S Corp" and labels it as "OUTSIDE SERVICES/INDEPENDENT CONTRACTOR" - is that the correct place?
3. For 2021 my S-Corp had a loss and I did not take any money out of the business. I also did not take a "reasonable salary" because the business had no money.  In fact, I had to fund the business with more capital funding from my personal account.  Am I correct in specifying $0 for line 7 (Compensation of officers) and $0 for line 8 (Salaries and Wages) on the 1120-S form? Or is that a red flag for the IRS?

Thank you!

[Vanessa A · Accepted solution]

1. Yes, since you wrote the check in 2021 you can still claim the expense

2. It depends on what the contract work was.  If it was an independent contractor that you paid for services such as consulting, then yes.  If it was a construction contractor you paid to remodel your building, then it would go under the appropriate asset. 

3. If you had a loss and no compensation, salaries or wages, then, yes, you would need to enter $0 if that is the correct number.  

[Carl]

For #1, you are considered to have paid the money the day you put the check in the mail. As of that date, you no longer have "constructive receipt" of that money.

What I do with my business checks, they have on them "VOID after 90 days". So if the check is not cashed within 90 days after the date on the check, it's no good. When t hat happens, I just add it as business income for whatever tax year the check becomes invalid.

[f404]

Thank you for the quick response @Vanessa A and @Carl !

• The service was in fact IT consulting and web development, so I think it's in the right place on the return forms ("OUTSIDE SERVICES/INDEPENDENT CONTRACTOR" row on the page called "Additional information from your 2021 US Form 1120s: Income Tax Return for S Corp").
• A couple follow-up questions - the amount I paid this contractor was $12,000, but I didn't issue an 1099-MISC. But I do have the bank statements and the copy of the check.
  • Will the lack of 1099 cause an issue or red flag?
  • An accountant friend told me a round number like that ($12,000) may raise a flag with the IRS. Is this actually true? If I paid $12,000 for a service, why would that raise a flag?

[Vanessa A]

Then yes, it is in the correct spot.

1099's are issued in January of the following year.  So, you will need to issue the 1099 this month when you do your taxes.  I am assuming you are using TurboTax Home and Business or Self-Employed.  Both of these programs will ask you if you paid over $600 to anyone and then will help you fill out and issue the 1099.

Keep the cancelled check and that along with the 1099 will not cause any red flags to be raised.

[VolvoGirl]

You will probably need to prepare a 1099NEC not a 1099Misc. For Turbo Tax Business......

You can  prepare  W2s and 1099s by starting a new return, go to FILE - NEW TAX RETURN

On the Work on a Tax Return screen or Welcome to TurboTax screen , scroll down to the bottom and click the blue Prepare W-2/1099 button.

On the next screen, Choose where to prepare your forms, click the Online or Desktop option.  

https://ttlc.intuit.com/questions/1900412-how-do-i-create-w-2-and-1099-forms-in-turbotax-business

[Opus 17]

Before you engage a subcontractor, you need to get a signed W-9 form from them.  On the W-9, the contractor will give you their tax number and will check a box for what kind of business entity they are.  If they check the box for S- or C-corp, you do not issue a 1099.  If they check the box for sole proprietor or partnership, then you must issue a 1099.  Because the payment was compensation for work they performed, it would be a 1099-NEC.

Under some cases, if you fail to get a W-9, the IRS can assess you a penalty.  You may also be required to withhold part of your payment as backup withholding, and send it to the IRS in the contractor's name.  (When the contractor files their tax return and reports the income, they also get credit for the withholding.). Failure to keep backup withhold can also result in a penalty.

You need to get the W-9 ASAP.  Then you need to issue the 1099-NEC by January 31.