Contractor Deduction / Reimbursement

[mgc6288]

I have a contractor to whom I will need to 1099 at year's end.  A few third parties have contributed to help absorb the cost.  On my schedule E do I:

A) Claim their contributions on income line 3 and then 1099 the full amount that I paid the contractor?

B) Only claim and 1099 the contractor the net out-of-pocket amount?

C) Some other solution?

[Opus 17]

You must report the full amount you pay to the contractor on a 1099-NEC.

Are you saying that other people are paying the contractor on your behalf?  Or are you saying other people have given you money to help pay the contractor?

Since this is a schedule E, I will assume this is repairs to a rental property for sake of argument.  If other people paid the contractor, then you issue the 1099 for what you actually paid, and only the amount you paid is a deductible rental expense.  For example, if the repairs cost $1000 but you only paid $800, then you issue the 1099 for $800 and your expense is $800, not $1000.  

If other people paid you, and you paid the contractor the entire amount, then you issue the 1099 for whatever you paid and whatever you paid is the rental expense.  But, we then have to ask, were the third party payments to you reportable as income on schedule E, or were they non-taxable gifts.  I think that depends on the business relationship, if any.  Suppose the property is a historic landmark that was damaged in a storm.  If you get a grant from the city or a historic preservation organization to help with repairs, that is taxable to you because you had a business relationship with the payor.  Likewise if your tenants helped pay, because of the business relationship.  But if you set up a gofundme to help repair the historic property, and the donations were freely given by strangers who had no interest in the property, then those might be non-taxable gifts.                 

[mgc6288]

We have hired a lawyer in a lawsuit where we all have interests but the lawyer wants one client to handle the money.  So everyone has paid me and I'm paying the lawyer on behalf of all of us.  

I understand that only my portion is an expense.  Lets say the Lawyer is $2000 and some other fellows paid me $1500 where I am to write a check on behalf of my LLC for $2000.   I understand that I can only deduct $500. 

My question is, since Schedule E line 10 will have $2000, will the IRS be scratching their heads when I only 1099 for the $500, or since my portion is under $600 then I do not need to?  Are they expecting me to 1099 for the $2000 claimed?

OR, since this money was deposited into my LLC bank account, do I need to claim this money as "income" and then 1099 the lawyer for the entire $2000 deduction?  

I understand the end result is the same - $500 deduction - but what is the most proper way to claim it?

@Opus 17 

[Opus 17]

@Carl 

@tagteam 

@rjs 

Thoughts?

[tagteam]

Each party cannot issue a 1099-NEC for their share (if that is even necessary)?

@mgc6288 appears to be nothing more than a conduit for payment to a third party.

[mgc6288]

Correct.  My gut instinct is to add the sum of all payments and reimbursements for this lawyer to Schedule E, line 10 and then 1099 this amount if over $600 which will be equivalent to my out of pocket portion.  Then have my bank statements handy to explain to the IRS if I'm audited as to what the deposits were for. 

This new law of the bank reporting all deposits over a few hundred bucks really is an overreach.

@tagteam 

@Opus 17 

[Opus 17]

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@mgc6288 wrote:

Correct.  My gut instinct is to add the sum of all payments and reimbursements for this lawyer to Schedule E, line 10 and then 1099 this amount if over $600 which will be equivalent to my out of pocket portion.  Then have my bank statements handy to explain to the IRS if I'm audited as to what the deposits were for. 

This new law of the bank reporting all deposits over a few hundred bucks really is an overreach.

@tagteam 

@Opus 17 

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There's nothing new about the $600 limit for 1099-NEC, that's been the law for at least 10 years.

I don't like the idea of putting the entire legal expense on line 10 unless you also include the conduit payments from the other parties as income, or as negative adjustments on line 10.  I would rather see line 10 be only your share of the legal fees.  You can still issue a 1099-NEC for the entire amount, it does not have to match your tax return.  I think the ability of the IRS to "match" different forms and find inconsistencies is overrated, according to other discussions I have seen here on various topics.  In the event the IRS does come back to you and ask why you issued a 1099 for $2000 when you only show $500 of expenses, you can explain the situation then.

[tagteam]

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@Opus 17 wrote:

I would rather see line 10 be only your share of the legal fees.  You can still issue a 1099-NEC for the entire amount, it does not have to match your tax return.

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I concur with the above statements by @Opus 17 100%. 

[mgc6288]

I poorly worded my last response.  When I said "sum" I meant "difference" between what I gross pay the lawyer minus the reimbursements others have paid me.  That net amount is what I feel I should put on line 10 and then file via 1099-NEC... that is if everyone here concurs that's the cleanest way for the IRS.  

The $600 1099 amount is not what I was in reference to though with the overreach.  I was referring to the new "Inflation Reduction Act" law where over a few hundred dollars the banks need to start submitting to the IRS.  It used to be over $10k but this new nonsense in my opinion is way too Big Government.  Here I am simply collecting small payments just to make a big payment but now have to look over my shoulder and see if Big Government is going to harass me about it.