When to treat an expense I didn't receive and amount was refunded

[rosenhol807]

I have my own consulting LLC (cash basis for tax) which had a lot of net income for 2019.  During the year, I paid another consulting firm for training and consulting work while looking to build out my area of expertise and my overall practice.  The other firm was unable to deliver and promised to refund the money by the end of 2019.  They mailed the check on 12/30/19 and I received it today (1/2/20).  Two questions.  1) Do I report the expense in 2019 and refund in 2020 since I'm a cash basis tax paper (Schedule C) and 2) Do I need to issue a 1099-Misc for 2019 even though I received the money back.  I was told I will not receive a 1099 from the other consulting firm since the amount was refunded in full in the same year.   I would prefer to take the expense in 2019 and show the income in 2020

[DanielV01]

Because you use cash-based accounting, both the "expense" and the "refund" are 2019 activities.  The expense clearly is a 2019 activity.  But the refund is as well.  Although you physically received the check on January 2 of this year (today), it is considered "constructively received" in 2019 per IRS standards because the check was issued on December 30, 2019.  The same standard is used when a company pays an employee.  If the company issues a payment on December 30, the income is included in the employee's W-2 for 2019, although the employee may not see it in the bank account until 2020.  See this article for additional information:  Constructive Receipt of Income

If the net difference between the expense and the payment is less than $600, it is technically not necessary to issue a 1099, but you may want to anyways.  Best practice on the Schedule C is to include the refund as income and expense the contract payment just so that there is a paper trail if the IRS or another taxing authority questions the books.  But both are reported for 2019.